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OSMANIA UNIVERSITY LIBRARY 

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Title 

This book should be returned on or before the date last marked below. 







ACCOUNTING PRINCIPLES 
FOR ENGINEERS 



The quality of the materials used in 
the manufacture of this book is gov- 
erned by continued postwar shortages. 



ACCOUNTING PRINCIPLES 
FOR ENGINEERS 

FORMERLY PUBLISHED UNDER THE TITLE OF 
COST FINDING FOR ENGINEERS 



BY 

CHARLES REITELL, PH.D. 

Stevenson, Jordan, & Harrison, New York; 
Formerly Professor of Accounting, University of Pittsburgh 

AND 

CLARENCE VAN SICKLE, M.A. 

Associate Professor of Accounting, University of Pittsburgh 



SECOND EDITION 
SEVENTH IMPKESSIONT 



McGRAW-HILL BOOK COMPANY, INC. 

NEW YORK AND LONDON 
1936 



COPYRIGHT, 1930, 1936, BY THE 
McGRAW-HiLL BOOK COMPANY, INC. 



PHINTED IN THE UNITED STATES OF AMERICA 

All rights reserved. This book, or 

parts thereof, may not be reproduced 

in any form ivithout permission of 

the publishers. 



THE MAPLE PRESS COMPANY, YORK, PA. 



PREFACE 

In presenting this volume 4 t<f the student the authors have 
set forth those elementary principles of accounting upon which 
accurate cost findings are based. Only such principles as are 
fundamental to a sound introduction to factory cost accounting 
are emphasized. Thus, no time is wasted and no efforts are 
dissipated in treating the phases of general accounting that 
bear but an indirect relation to cost accounting. 

The volume has been written with the definite and avowed 
purpose of providing a textbook for students who are interested 
in the study of cost accounting. 

The material embodied in this book, in the sequence in which 
it is here presented, has been offered for seven years at the 
University of Pittsburgh in a course bearing the title Introduc- 
tion to Cost Finding for Engineers. The material has been 
tried out and proved successful. 

Instructors will find ample opportunity for supplementing 
the text by bringing in illustrative material from local indus- 
tries. The methods of applying the principles in the text to 
specific situations make classroom discussions the best method 
of presentation. The authors do very little lecturing in 
conducting their classes. Study of the text, coupled with 
guided discussion, has been found adequate to ground the 
student in the factory accounting fundamentals. 

A large number of executives of Pittsburgh industries, with 
their engineers and accountants, not only have given much of 
their time and advice in the preparation of this volume, but 
have permitted the use of forms taken from their own establish- 
ments. Without this cooperation the book would have been 
decidedly incomplete. To them we extend deep appreciation. 

Mr. Robert D. Ayars, Professor of Accounting at the 
University of Pittsburgh, has read the entire manuscript and 
has given unstintingly of his time in helping to improve the 
presentation. For this service the authors owe Mr. Ayars an 



vi PREFACE 

unpayable debt. Much credit likewise goes to Dr. Lawrence 
W. Bass, formerly Executive Secretary of the Mellon Institute 
of Industrial Research at Pittsburgh, and to Mr. Emory A. 
Austin, C.P.A., Auditor of the Hammermill Paper Company 
at Erie, Pa., who have read the entire manuscript and given 
valuable suggestions pertaining to it. 

CHAKLES REITELL. 

CLARENCE VAN SICKLE. 
PITTSBURGH, PA. 
August, 1936. 



CONTENTS 

PA OH 

PREFACE .......................... v 

INTRODUCTION 

CHAPTER 

I. THE RELATION BETWEEN ACCOUNTING AND COST Ac- 

t^trjHtMr*' 

COUNTING __^* 



PART I 
ACCOUNTING TECHNIQUE 

II. ACCOUNTS AND THEIR CLASSIFICATION ..... 5 

III. PRINCIPLES OF DEBIT AND CREDIT ..... 25 

IV. RECORDING PLANT TRANSACTIONS ....... 45 

V. LEDGER OPERATIONS ...... ....... 60 

VI. PREPARATION OF THE WORK SHEE*: ....... 83 

VII. ACCRUALS AND PREPAYMENTS ............. 93 

VIII. ACCOUNTING FOR DEPRECIATION AND DEPLETION ..... 107 

IX. RESERVES AND FUNDS ............... <. . 131 

X. THE CONSTRUCTION OF ACCOUNTING STATEMENTS. \ ... 152 

XL CLOSING THE OPERATING ACCOUNTS ........... 172 

PART II 
BASIC VALUATION PRINCIPLES 

XII. CAPITAL VERSUS OPERATING EXPENDITURES ....... 186 

XIII. THE VALUATION OF CURRENT ASSETS .......... 193 

XIV. THE VALUATION OF FIXED ASSETS ........... 206 

PART III 
FACTORY CONTROLS 

XV. COLUMNAR BOOKS A MEANS TO FACTORY CONTROL .... 225 

XVI. CONTROL ACCOUNTS WITH CUSTOMERS AND SUPPLY COM- 

PANIES ...................... 237 

XVII. THE VOUCHER SYSTEM ................ 259 

XVIII. COST ELEMENTS ................... 285 

XIX. INVENTORY CONTROLS ................. 294 

XX. EXPENSE CONTROLS .................. 309 

XXI. EQUIPMENT CONTROLS ................. 325 

XXII. THE HANDLING OF PAYROLLS .............. 333 

XXIIL CODE CLASSIFICATIONS ........... , f , , , 347 

vii 



viii CONTENTS 

PART IV 

REVENUE ACCOUNTS 

CHAPTER PAGE 

XXIV. THE PRINCIPLES AND OPERATION OF REVENUE ACCOUNTS. 357 

XXV. OPERATING STATEMENTS UNDER REVENUE ACCOUNTS . . . 370 

PART V 
THE OUTLINE OF ADVANCED COST FINDING 

XXVI. THE DYNAMIC USE OF COSTS 386 

PROBLEMS 393 

INDEX 513 



ACCOUNTING PRINCIPLES 
FOR ENGINEERS 

INTRODUCTION 

CHAPTER I 

THE RELATION BETWEEN ACCOUNTING AND COST 

ACCOUNTING 

Accounting is a science that deals with the analysis, record- 
ing, and presentation of business transactions. Within every 
business enterprise, the transactions are constantly occurring. 
Without the transactions, there can be no business, especially 
a going concern. The principal purpose of accounting is to 
show the effect of the transactions upon the ownership of the 
business, that is, whether or not a profit has resulted from the 
operation of the business. 

Cost accounting is a special field of accounting which is 
devoted to the analysis, recording, and presentation of the 
transactions that pertain to the production activities of a 
business. Business activities of this class consist primarily 
of manufacturing, mining, and construction pursuits. 

In the last two decades there has been a dominant shift in 
the type of service given by cost accounting to industry. 
During earlier days the outstanding purpose of cost accounting 
was to act as a guide to proper selling prices and the establish- 
ment of scientific bidding. By the use of costs, unprofitable 
lines of product were segregated from profitable ones. In 
fact, the industrial executives who had sufficient foresight to 
use scientific cost methods gained a great advantage over their 
competitors who operated by rule of thumb. 

But fundamental changes, yes, almost revolutionary ones, 
are taking place in industry changes which, in addition to 
the above worthy services, place new and very definite respon- 

1 



2 COST FINDING FOR ENGINEERS 

sibilities upon the factory accountant, and upon the engineer. 
With the uprootings of the World War, the industrial swing 
toward standardization, the development of high-speed tools, 
and with the swift handling of materials by mechanical 
conveyors, and with the rapid change from manual to auto- 
matic machine production have come stringent demands upon 
costs to meet these fundamental industrial changes. This new 
day in industry calls forth a definite analytical application of 
costs to the minute operations and units of production in every 
division of the plant. 

With standardization, uniform practices, and high-speed 
production, the engineer in modern industry now finds that 
in addition to his j^ell-3tblia]jed measurements of speed, 
design,, cuts,, stress of materials, etc., Has ~eome -another and 
most necessary form of measurement. He must now be able 
to analyze every detailed part and parcel of production in terms 
of dollars and cents. In short, he must know detailed " costs " 
of every performance if he is to measure successfully rnlernal 
plant conditions. 

Cost finding offers the necessary tool for measuring the 
productive performances of men and machines. This cost 
finding in turn is dependent upon two important factors. 

First^thc system of collecting and compiling cost data must 
be "an integral part of the general accounting system of the 
enterprise. So close must this relationship be that at no 
time can the cost figures be out of control with the general 
accounting books. 

Second, the cost accountants and the plant engineers and 
managers must understand the more important cost processes 
in order that the latter named group can us6 intelligently the 
cost findings as they are reported from time to time. The cost 
accountants analyze the cost data, and present their findings 
in accounting statement and cost report forms. The engi- 
neers as a technical group are responsible for detail analyses 
as to both form and structure of product and it is they who are 
interested in having every minute part of the product turned 
out at the most economical cost figure. 

The purpose of this text is to give the student of business 
and engineering a working knowledge of the fundamental 
introductory accounting principles that are necessary to the 
understanding of cost finding. This book is so arranged that 



ACCOUNTING AND COST ACCOUNTING 3 

both the basic general accounting principles and the practical 
application of those principles are fully covered. 

At the very start of this text let it be emphasized that it is 
no child's play to gain a working grasp of accounting. One 
cannot achieve a usable knowledge of accounting and costs 
by attending a few lectures or by reading a few magazine 
articles. If such were the case, then thousands of individuals 
would have a more intimate knowledge of accounting and 
cost finding than they now possess. Trained engineers know 
full well that in order to master a tool, trained skill is absolutely 
necessary and that it takes time to develop trained skilL 
Accounting and cost finding are no exception to that rule. To 
prepare adequately the student for the proper handling of 
costs demands that he be trained by actually doing all the 
accounting activities that cover or are related to the manu- 
facturing enterprise. This text has been shaped upon that 
basic principle. The authors can offer neither short cuts nor 
quick methods for gaining mastery. 

Both authors have had years of experience in instruct- 
ing students in accounting. Both authors also have been 
employed as business consultants and accountants where 
practical accounting and cost problems have been presented 
for analysis and solution. This constant experience with 
students and industry, coupled with a wholesome cooperation 
coming from many business men and engineers, brings to the 
reader actual accounting and cost practice interpreted to his 
needs as a student. 

Step by step the student is carried through the rudiments 
of elementary technique of accounting to a place where he 
is able to master the more difficult principles and applications 
of cost finding. Many of the problems as well as the illus- 
trative material presented have been taken first hand from 
actual manufacturing industries. 

This text is divided into four main divisions, each one of 
which forms a foundation for proper cost finding. Part I 
presents the basic principles of general accounting technique. 
As cost finding is an expansion of general accounting procedure, 
there is no better starting point for the beginning student 
than to acquire a knowledge of general accounting. Part II 
develops the fundamentals of asset valuations. Through the 
operation and maintenance of assets products are manufac- 



4 COST FINDING FOR ENGINEERS 

tured. Only by understanding that these assets are running 
constant expenses that must finally get into the cost of product 
can an adequate knowledge of cost finding be achieved. Part 

III describes in detail the use of control accounts. Accurate 
cost finding and the proper operation of a cost system are 
dependent upon the principle of accounting controls. Part 

IV paves the way for higher cost-finding procedure by describ- 
ing the processes of unit product cost finding. 

Questions 

1. Define accounting. 

2. What is meant by cost accounting? 

3. When cost accounting first came into existence, what use was made 
of costs? 

4. What are the newer demands made upon cost accounting? 

5. Name the different factors responsible for bringing about the newer 
cost applications. 

6. What must the engineer in modern industry be able to do in addition 
to measuring performance in terms of time and quality production? 

7. What typifies the present production r6gime? 

8. Why is it that retarded production and idle plants are considered 
to be costly? 

9. What is meant by " measurement of performance" from a cost 
point of view? 



PART I 
ACCOUNTING TECHNIQUE 

CHAPTER II 

ACCOUNTS AND THEIR CLASSIFICATION 

1. Business and Business Organization. 

A business is some pursuit in which one or more persons are 
engaged regularly and usually for profit. The business may 
be organized for rendering professional services, for engaging 
in commercial activities, or for operating mining, manufactur- 
ing, or construction enterprises. 

; A business is generally classified as a sole proprietorship, a 
partnership, or a corporation. 

A sole proprietorship is a business owned by a single indi- 
vidual. There are thousands of small concerns that come 
under this classification consisting, principally, of individuals 
engaged in retail trading pursuits. 

A partnership is an association of two or more individuals 
who combine their capital and skill for the purpose of carry- 
ing on a business. Each of the partners assumes an unlimited 
liability with respect to the partnership debts incurred} 
unless by a legal procedure the liability of all but one of the 
partners is limited to their respective investments. In a 
limited partnership, one of the partners must accept the 
general or unlimited liability of the firm. 
: \ A corporation is formed when three or more persons apply 
for and are granted a charter in accordance with the statutes 
of the state (Pennsylvania). The corporation is viewed as an 
artificial person in the eyes of the law; it can sue and be sued. 
The evidence of ownership in the corporation is the capital 
stock certificate issued by the corporation to the purchasers 
thereof known as the stockholders or the shareholders. Capi- 
tal stock may be issued with a par value of some stipulated 

5 



6 COST FINDING FOR ENGINEERS 

amount, usually $100, or it may be issued as no-par value 
stock at any arbitrary value set by the board of directors. 
The articles of incorporation signed by each of the incorpora- 
tors, among other things, must state the aggregate number of 
shares which the corporation shall have authority to issue, 
both as to par value and no-par value. The shareholders own 
the capital stock certificates, but the corporation owns the 
property or the assets of the corporate business. The share- 
holders elect annually a board of directors whose duty it is to 
direct the management of the corporation. Every business 
corporation also has its executive officers in the names of the 
president, secretary, treasurer, and such other officers as are 
necessary for the operation of the business. The officers may 
be elected or appointed by either the board of directors or the 
shareholders. 

2. Accounting and Business Organization. 

The nature of the business enterprise is, with respect to its 
purpose and legal classification, the principal factor in the 
design of its accounting system. The accounting system is 
built around the business organization. In order that the 
business transactions can be assembled for the purpose of the 
measurement of their effect upon the ownership of the enter- 
prise, it is necessary to make use of a device known as the 
account. 

3. The Purpose of the Account. 

Accounts are fiscal barometers of a business. Without 
accounts there would be no record of the progress or decline 
of a concern. The absence of accounts has brought about 
the death of many an establishment simply because there 
was no basis for measuring profits or losses. This is an era 
of high-powered competition. Such competition demands 
that business enterprises produce, distribute, and manage 
efficiently. Efficient management implies adequate control. 
The executive or engineer who cannot place his finger upon 
the details of a business does not have adequate control. 



ACCOUNTS AND THEIR CLASSIFICATION 7 

Without accounts there can be no effective control, and 
the enterprise flounders helplessly or succumbs from the 
want of intelligent guidance. The account is the medium 
through which effective managerial control and financial 
status are reckoned. 

4. The Use of the Account. 

The detailed information, relative to business and indus- 
trial transactions, is recorded in the various accounts. All 
accounts record values relative to ownership by showing : 

1. The various assets or property owned. 

2. The existing liabilities or debts owed. 

3. The capital investment or ownership interest. 

4. The income earned. 

5. The production, marketing, administration, and finan- 
cial expenses. 

It is the daily business transactions pertaining to producing, 
marketing, administering, and financing that are recorded 
and summarized in the accounts. From these accounts 
are prepared periodic financial statements as to the condition 
of the enterprise. An analysis of the financial statements 
often will bring to light malconditions. As a result, remedies 
may be applied to relieve such conditions, and future poli- 
cies may be determined. Thus the executive or the engi- 
neer may draw conclusions as to the needs of the business 
by reviewing the summary statements prepared from the 
accounts. Before proceeding further in regard to the purpose 
and function of the account, its nature will be disclosed in 
order that it may be identified at sight. 

6. The Home of the Account. 

Accounts are kept in a book called the "ledger." The 

mi r imu - - 1 , jii,, a , , ,|i n nmm inn -- ^r"" 1 ****^ 1 "" * "***i*'-"~^-** <*> ""- .-.^- , - irlr> .j* *j *,,-* *.*!>/. , J <,****''**' ' v *^" lV "*w j^*** 

purpose of the ledger is to house, in a classified manner, 
the transactions of the business. The ruling in the ledger 
is the ruling for the accounts. There is a wide variance in 
the style and ruling of the ledger. Regardless of its form, 
however, the ledger has but one function, that of housing 
the accounts. Form 1 gives the typical rulings of an account. 



8 



COST FINDING FOR ENGINEERS 
FORM 1. LEDGER PAGE 



Title of account Page No. 
(Debit Side) (Credit Side) 


Year 






J 






Year 






J 






Month 


Day 


Explanation 


o 


Amount 


Month 


Day 


Explanation 


o 


Amount 








u 












u 












r 












r 












n 












n 












a 












a 












1 












1 












F 












F 












o 












o 












1 












1 












i 












i 












o 












o 







6. The Nature of the Account. 

An account is a systematic record of both like and unlike 
transactions pertaining to the same person or thing. Why 
does an account contain like and unlike items? The reason 
is seen in the following Cash account. 

FORM 2. CASH ACCOUNT 



Cash 1 
(Debit) (Credit) 


19- 












19 












Jan. 


2 


Capital in- 








Jan. 


5 


Rent 




$ 100 


00 






vestment of 










6 


Purchases 




1,000 


00 






H. J. Finley 




$40,000 


00 






Wages 




150 


00 




7 


Sales 




500 


00 




10 


Purchases 




500 


00 




11 


Sales 




725 


49 















The items on the left-hand side of the account represent 
receipts of cash from two different sources, namely, $40,000 
from the investment by the owner of the business, and various 
amounts from the sales of goods. On the right-hand side of 
the account, disbursements for rent paid, wages paid, and 
purchases made are entirely different expense items. Other 
receipts and disbursements recorded in the Cash account 



ACCOUNTS AND THEIR CLASSIFICATION 9 

may be wholly different from those already shown. Again 
in the course of a year's business, there will be many more 
receipts from sales and payments for like items of rent, wages, 
and purchases. What holds true for the Cash account is 
similarly true of all other accounts pertaining to the "like 
and unlike " transactions. 

At the beginning of each account the date column should 
show the year. This may seem to be a trivial principle. 
Its importance is duly recognized when an audit of the books 
is made at some subsequent date. The name of the month 
is written on either side of the account but once, and then 
for the first transaction recorded in that particular month. 
If there be receipts from several sources or disbursements 
to various persons on any given date, the date of the month 
is usually shown but once. 

The function of the journal folio column on both sides of 
the ledger account is disclosed in Chap. V, Sec. 3. 

7. The Accounts Analyzed. 

Attention has been called to the two sides of the account. 
The left-hand side is termed the "debit" side; the right- 
hand, the "credit" side. This is the first technical principle 
that must be driven home. Through custom and common 
practice the left-hand side always represents debits and the 
right-hand side credits. 

8. The Classification of Accounts. 

Accounts are divided into two major groups, namely, 
"capital" and "operating" accounts. These major groups 

CHART 1. THE CLASSIFICATION OF ACCOUNTS 

.Assets 
apitaK^ .Liabilities 

Equities^ 
Accounts ^ Ownership 




Operating cT 

Incomes 



10 COST FINDING FOR ENGINEERS 

are subdivided into more refined divisions. The classification 
is probably best visualized in Chart 1. 

Asset, liability, ownership, expense, and income accounts 
are subdivisions of the major groups. Each of the five divi- 
sions is in turn subclassified. A countless number of specif- 
ically named accounts are classified under these five divisions. 

The importance of being thoroughly familiar with the 
classification of accounts cannot be too strongly emphasized. 
Its relationship to the accounting statements is revealed in 
Sees. 17 and 19 of this chapter; to the trial balance in Sees. 
9 and 10 of Chap. V. 

9. The Asset Accounts. 

Assets are property. Everything owned by a business 
is an asset. There is also a corollary to this statement. Any- 
thing owing to a business is an asset. Assets may be sub- 
classified as current, fixed, and deferred. 

Current assets represent cash or any other asset which will 
be converted into cash in a relatively short period of time, 
usually not longer than a year. 

Fixed assets are those pieces of property necessarily owned 
by the business to facilitate in the transaction of its daily 
operations. They are not purchased with the intention to 
sell at a profit. They remain in the business as long as they 
render adequate service. 

Deferred charges and prepaid expenses are classified as 
assets. They constitute the present value of the unused 
portions of certain expense items (see Chap. VII, Sec. 7). 
A prepaid insurance premium for a term of 3 years is a typical 
example of this type of asset. The unexpired portion (two- 
thirds) at the close of the first year constitutes a real definite 
value unused at that time, hence an asset. 

10. Equity Accounts. 

Equity means a right. In an accounting sense it means a 
right held by others to the assets of the enterprise. There 
are two distinct classes of equities, namely, ownership and 
liabilities. 



ACCOUNTS AND THEIR CLASSIFICATION 11 

11. Ownership Accounts. 

The capital invested by the owner of a business constitutes 
his ownership and also his equity. Capital invested may 
consist of cash or other current or fixed assets. When capital 
is placed in a business by an individual, he has a right to 
expect its return in event he discontinues operation. This 
right possessed by the contributor of the capital is his equity 
in the assets. The most common types of ownership are 
those of an individual, a partnership, or a corporation. 

The investment of the individual owner is termed his 
capital, and the account is shown in the ledger, for example, 
with the title "H. C. Thompson, Capital." 

When two or more persons combine their capital for the 
purpose of carrying on a business with unlimited liability it is 
termed a partnership. The investment of each partner is 
shown in a separate ownership account. 

The investments of the stockholders are shown in an account 
called Capital Stock. The net profit of a corporation is not 
carried in the Capital Stock account, but it is shown in a 
Surplus account. The combined amounts in the two accounts 
represent the ownership of the corporation. 

12. Liability Accounts. 

A liability is an obligation or a debt owed by a business. 
Credit, a form of debt, is one of the dominant factors in our 
present economic organization. Materials and supplies are 
purchased, almost universally, by means of credit, or as it is 
termed in business "on account." A merchant or a manu- 
facturer buys materials, and according to the usual terms 
of the invoice has 30 days in which to make payment. The 
party making the sale is termed the "creditor. 11 He pos- 
sesses the right to expect payment for the goods which he 
has sold on account. Until this right is fulfilled the creditor 
possesses an equity in the assets of the business. The equity 
of the creditor, in the assets of a concern, always ranks 
ahead of the equity of the owner. Liabilities, like assets, 
may also be classified as current, fixed or long-term, and 
deferred. 



12 COST FINDING FOR ENGINEERS 

Debts to be paid within a period of 1 year or less are usually 
termed current liabilities. 

Long-term liabilities are obligations maturing at some date 
in the future exceeding 1 year. 

There is another class of liabilities called "contingent." A 
contingency is an Uncertain future occurrence. The term 
"contingent liability" is an item that may or may not result 
in an actual liability. An illustration is a customer's note 
which has been discounted. When a sale is made to a cus- 
tomer on account, the customer is usually given a credit 
period of 30 days before cash payment is expected. If at the 
end of this time, the customer cannot pay cash, he may make 
arrangements to give the seller of the goods a note in settle- 
ment of the open account balance. The note is termed a 
"note receivable." It usually bears a legal rate of interest, 
and it is issued for any definite period of time, usually for 30 
or 60 days. The seller may elect to hold the note until its 
maturity date, or he may discount it at the bank. If he elects 
the latter procedure, he endorses the note, the bank deducts 
the interest for the discount period, and the seller receives the 
net proceeds from the discounted note. In accordance with 
the law of negotiable instruments, the seller now is contin- 
gently liable to pay the bank the amount of the discounted 
note in event the maker or customer fails to pay the bank at 
the maturity date. From the time that the note is discounted 
until the date the note falls due, the seller is said to have a 
contingent liability called "note receivable discounted." 

Deferred credits to operation and prepaid income are 
considered to be liabilities. Such credits represent the present 
value of the unearned portion of certain income items (see 
Chap. VII, Sec. 8). 

13. Expense Accounts. 

Expense accounts comprise the larger of the two groups 
known as operating accounts. Expense, in accounting 
parlance, means the cost of carrying on the business; the 
cost of obtaining income. Expenditures, the benefit of 
which lasts pnly one accounting period, are considered 



ACCOUNTS AND THEIR CLASSIFICATION 



13 



expenses. All items involving the cost of production, market- 
ing, administration, and management are considered as 
expenses. 

14. Income Accounts. 

The other group of operating accounts are known as income 

accounts. They record the amount of earnings from opera- 

| tions and other incidental sources. The sale of merchandise or 

finished goods is the principal source of income for any trading 

or manufacturing concern. 



15. Personal and Impersonal Accounts. 

There are other supplementary account classifications not 
apparent as such in Chart 1. This classification is the one of 
personal and impersonal accounts. 

Personal accounts are accounts with debtors, creditors, 
and ownership. All personal accounts are also classified as 
capital accounts. 

When a sale is made to a customer on account, it establishes 



(Debit) 



FORM 3. ACCOUNT WITH CUSTOMER 
F. S. Slydcr 



(Credit) 



19 












19 












Feb. 


7 


Sales 




$ 416 


77 


Feb. 


28 


Cash 




$ 250 


00 




27 







982 


05 




29 


Balance 




1,148 


82 










$1,398 


82 










$1,398 


82 


Mar. 


1 


Balance 




$1,148 


82 


Mar. 


3 


Cash 




$166 


77 




16 


Sales 




458 


85 




29 


it 




982 


05 




30 







176 


99 




31 


Balance 




983 


74 




31 







347 


90 






















$2,132 


56 










$2,132 


56 


Apr. 


1 


Balance 




$ 983 


74 















14 



COST FINDING FOR ENGINEERS 



a debt owing to the business. The buyer is said to be a debtor 
of the business, and the customer's account is termed an 
account receivable. An accounts receivable account is an 
asset since it represents a value owing to the business. 

The purchase of materials or merchandise on account 
creates the existence of a creditor or an account payable. 
Accounts payable are liabilities representing amounts which 
are owed by the business. 



(Debit) 



FORM 4. ACCOUNT WITH CREDITOR 
Union Iron Company 



(Credit) 



19 












19 












Feb. 


13 


Cash 




$1,972 


81 


Jan. 


14 


Purchases 




$1,972 


81 


Mar. 


2 


u 




2,637 


48 


Feb. 


1 


a 




2,637 


48 
















17 


u 




510 


92 
















28 


it 




861 


47 



Customers' and creditors' accounts may be with either 
individuals, partnerships, or corporations. 

Ownership accounts showing the investment of the indi- 
vidual owner or of partners are also personal as well as capital 
accounts. 

Contrasted with these personal accounts, which record 
values owed to or by persons, are all the other accounts 
recording values of things. Impersonal accounts may be 
either capital or operating accounts. Capital accounts, 
impersonal in nature, are accounts with Cash, Land, Build- 
ings, Equipment, Mortgages, Bonds, etc. All operating 
accounts with expense and income are impersonal. 



16. The Distinction between Capital and Operating Accounts. 

The ability to differentiate between capital and operating 
accounts is a feat of prime importance^ and may be considered 
as one of the three fundamental bases of introductory accounting. 



ACCOUNTS AND THEIR CLASSIFICATION 



15 



Knowing the classification of accounts is of great value, 
but the ability to distinguish an asset from an expense account, 
a liability from an income account is of even greater signif- 
icance. The necessity for this line of demarcation lies in the 
fact that two groups of accounts are used to prepare entirely 
different statements. Capital accounts are used in the 
preparation of the balance sheet; operating accounts in the 
statement of income, profit and loss. 

The other two bases which are of tremendous importance 
in introductory accounting are : 

1. The principles and methods of debit and credit. 

2. The structure of accounting statements. These subjects 
are described in detail in Chaps. Ill and X, respectively. 

17. The Relationships among Capital Accounts. 

The three classes of capital accounts, assets, liabilities, and 
ownership with their subdivisions, have been described in 

FORM 5 

H. C. THOMPSON 
BALANCE SHEET 

Dec. 31, 19 
Assets Liabilities and Ownership 



Current: 
Cash ......... $ 6,500 

Accounts Re- 

ceivable.... 30,910 
Merchandise 

Inventory. . 30,000 $ 67,410 
Fixed: 
Land ......... $15,000 

Building ...... 40,000 

Store Equip- 

ment ....... 5,000 

Delivery 

Equipment . 2,500 62 , 500 

Deferred Charges: 
Prepaid Insur- 
ance ....... 250 



$130,160 



Current Liabilities: 

Accounts Payable $ 8,600 

Long-Term Liabilities: 

Mortgage Payable , . . , 20 , 000 
Deferred Credits: 

Prepaid Rentals Re- 
ceived 50 

Ownership: 

H. C. Thompson, Cap- 
ital 101,510 



$130,160 



16 COST FINDING FOR ENGINEERS 

detail. Now for a perspective of the three general classes of 
capital accounts as a group, and a description of their func- 
tions. These asset, liability, and ownership accounts record 
the real or relatively permanent values existing in the business. 
The assets are owned and used; the liabilities are owed to 
creditors ; and the ownership is the capital investment of the 
owner or owners in the business. 

The manner in which the owner and the creditors have an 
equity in the assets has been described. The relationship 
may be evolved as follows : 

Assets = Rights to assets 
or 

. -n ., i- Owner 's investment 

Assets = Equity of -^^~ r , , . , , 
M J Creditors interest 

Thus the ownership equation is developed. It gives the 
basis for one of the important accounting statements, namely 
the balance sheet (see Form 5). 

18. The Operating Accounts. 

The function of operating accounts is to record profits and 
losses occurring within an accounting period. The period 
usually is 1 month, but may cover a longer time sweep, such 
as a quarter, a half year, or a year. Operating accounts, by 
their nature, represent changes taking place within a specified 
period, and when summarized at the close of the period indi- 
cate what changes have taken place in ownership. Operat- 
ing accounts are sometimes called profit and loss accounts, 
expense and income accounts, or revenue accounts. In a 
going concern dozens of different expense items arise each 
month, such as wages, power, taxes, insurance, light, supplies, 
etc. With the occurrence of each item of expense, the effect 
is to decrease ownership. But imagine the inconvenience of - 
changing the ownership figure in the balance sheet each time 
an expense was incurred! Separate accounts are maintained 
for each different type of expense. These expense accounts 
are then summarized periodically. Their combined effect 
upon ownership is then recorded. 



ACCOUNTS AND THEIR CLASSIFICATION 17 

Income accounts give the analysis of profit-making items 
coming to the business. The earning of income tends to 
increase ownership. Again it is not expedient to change 
the owner's Capital account with each increase in income. 
Various items of income are recorded in specific income 
accounts, such as sales of merchandise, interest earned, 
commissions received, rentals received, etc. Their aggregate 
effect on ownership is then periodically recorded. 

19. The Relationships among Operating Accounts. 

It is clear that expenses decrease ownership, while income 
tends to increase it. By applying this truism, the profit 

FORM 6 

H. C. THOMPSON 

STATEMENT OF INCOME, PROFIT AND Loss 
July 1, 19 to Dec. 31, 19 

Sales $68,775 

Cost of Sales: 

Inventory, July 1, 19 $24,000 

Purchases 60,000 

Cost of Goods Available for Sale $84,000 

Inventory, Dec. 31, 19 30,000 

Cost of Goods Sold 54,000 

Gross Profit on Sales $14, 775 

Marketing Expenses: 

Salesmen's Salaries $2 , 500 

Delivery Expense 1 , 500 

Advertising 90 

4,090 
$10,685 
Administrative Expenses: 

Insurance $ 175 

Office Expense 150 

Office Salaries 1 , 100 

Taxes 260 

1,685 
Net Profit from Operations $ 9,000 

Other Income: 

Rentals Earned 950 

Net Profit to Capital $ 9,950 



18 COST FINDING FOR ENGINEERS 

or loss from operations for any period may be ascertained. 
An excess of income over expense results in a net profit or 
net increase in ownership. On the other hand an excess of 
expense over income means a net loss or a net decrease in 
ownership. 

The operating accounts form the basis for the preparation of 
the second important accounting statement. It is known as 
the statement of income, profit and loss. Form 6 shows the 
outline of this statement. 

20. The Mixed Account. 

There are certain accounts whose natures are such that 
they present characteristics of both capital and operating 
accounts. The Purchases account has the characteristics 
of an asset as well as an expense. Materials and goods are 
purchased by concerns for but one purpose. It is to manu- 
facture commodities, or resell the same goods at a profit. 
The cost of the purchased goods sold is termed the "cost of 
sales." This cost is an expense. The value of the unsold 
purchases on hand at any time constitutes an asset. This 
inventory represents value tied up in goods and raw materials. 
It is termed the "raw material" or "merchandise" inventory, 
and as such is a capital account (see Chap. Ill, p. 35 for an 
explanation of this type of a mixed account). The Prepaid 
Insurance account, described in Sec. 9 of this chapter, is 
another illustration of a mixed account. 

The Rentals Received account illustrates a mixed account 
combining income and a liability under certain circumstances. 
If a business rented a portion of its building space and received 
3 months rent of $300 in advance on Dec. 1, 19 , and the 
fiscal period closed on Dec. 31, 19 , then, only $100 rent has 
been earned in the period closed Dec. 31, 19 . There exists 
a liability to the next period for $200 income belonging to 
that period. 

21. Title of the Account. 

The title of an account should be concise in every instance, 
and, at the same time, it should indicate clearly its nature. 
The account must be named so clearly that there will never 



ACCOUNTS AND THEIR CLASSIFICATION 19 

be any doubt as to whether it is an asset, liability, owner- 
ship, expense, or income. 

22. Arrangement of Accounts in the Ledger. 

The ideal arrangement of the accounts in the ledger follows 
the outline in Chart 2. Orderly arrangement provides for 
all capital accounts in one section. Liability and ownership 
accounts should follow the assets. This arrangement is of 
convenience when the balance sheet is prepared. 

All operating accounts should be grouped together under 
expense and income sections. They are convenient, then, 
for the preparation of the statement of income, profit and loss. 

The number of accounts *in a ledger depends upon the 
particular business. Its size and nature determines the 
transactions taking place. These in turn govern the number 
of accounts needed. 

23. Chart of Accounts. 

Chart 2 contains a rather comprehensive list of accounts 
in common usage. It is by no means complete in that it 
mentions every account in use. Its importance lies in becom- 
ing acquainted with the names of various capital and operating 
accounts, so that transactions may be recorded with greater 
ease, and financial statements may be prepared in better form, 

CHART 2. CHART OF ACCOUNTS 
I. CAPITAL ACCOUNTS 
A. Assets 

I. Current ^ 

Cash 

Petty Cash - 
Notes Receivable 

Less: Notes Receivable Discounted 
Accounts Receivable 
*Reserve for Uncollectible Accounts 
Investments (Readily Marketable Securities) ' 

Cash Advances 

* Signifies the account is a valuation reserve used in ascertaining the present value of 
the asset to which it applies. In the ledger these valuation accounts have credit 
balances. 



20 COST FINDING FOR ENGINEERS 

CHAKT 2. (Continued) 
Trading Concern Merchandise Inventory 



Inventories 



Manufacturing 
Concern 



Raw Material Inventory 
Goods in Process Inventory 



I Finished Goods Inventory 
Accruals Receivable: 

Interest on Notes Receivable 
Commissions Earned 
Rentals Earned 

2. Fixed 

Tangible 

Land 

Coal, Timber, Oil, or Mineral Deposits 

*Reserve for Depletion 

Buildings 

*Reserve for Depreciation on Buildings 

Machinery 

*Reserve for Depreciation on Machinery 

Tools 

Patterns 

*Reserve for Depreciation on Patterns 

Delivery Equipment 

*Reserve for Depreciation on Delivery Equipment 

Office Equipment 

*Reserve for Depreciation on Office Equipment 

Store Furniture and Fixtures 

*Reserve for Depreciation on Store Furniture and Fixtures 
Intangible 

Leasehold 

Patents 

Trade Marks 

Trade Formulas 

Copyrights 

Franchises 

Goodwill 

3. Deferred Charges to Operation 

Prepaid Insurance 
Prepaid Advertising 
Prepaid Discount 
Fuel Inventory 
Office Supplies Inventory 
B. Liabilities 
1. Current 

Notes Payable 
Trade Acceptances Payable 
Accounts Payable 
Dividends Payable 



ACCOUNTS AND THEIR CLASSIFICATION 21 

CHART 2. (Continued) 
Deposits, Company Employees 
Accruals Payable 

Wages Unpaid 

Taxes Unpaid 

Interest Unpaid on Notes or Mortgages or Bonds Payable 

2. Deferred Income to Operation 

Prepaid Rentals Received 

3. Long Term 

Mortgages Payable 
Bonds Payable 
C. Ownership 

1. Sole Ownership 

Owner's Capital 
Owner's Personal Account 

2. Partnership 

Partners' Capitals 
Partners' Personal Accounts 

3. Corporation 

Common Capital Stock (par or no-par value) 
Preferred Capital Stock (par or no-par value) 



Surplus 



Earned 

Appropriated 

Capital 



Reserve for Improvements 
Reserve for Contingencies 
Reserve for Sinking Fund 



, Donated 
II. OPERATING ACCOUNTS 

A. Income 

1. Principal 

Sales 

Sales Returns and Allowances (a decrease of income and 
has a debit balance in the ledger) 

2. Incidental 

Rentals Received 

Commissions Earned 

Interest Earned on Notes Receivable or Bonds Owned 

Dividends on Stocks owned 

Profit from Sale of Fixed Assets 

Miscellaneous Income 

Purchase Discount 

B. Expense 

1. Manufacturing 

Freight and Cartage (on purchases of raw materials) 

Purchases of Raw Material 

Direct Factory Labor 

Indirect Factory Labor 

Royalties (based on units produced) 

Fuel 



22 COST FINDING FOR ENGINEERS 

CHART 2. (Continued) 
Water 
Power 

Insurance on Buildings 
Insurance on Machinery 
Insurance on Patterns 
Shop Supplies and Expense 
Repairs to Buildings 
Repairs to Tools 
Repairs to Machinery 
Taxes on Land and Buildings 
Taxes on Equipment 
Rent 
Depletion 

Depreciation on Building 
Depreciation on Machinery 
Depreciation on Tools 
Depreciation on Patterns 
Depreciation on Patents 
Depreciation on Leasehold 
Depreciation on Delivery Equipment 

2. Marketing 

Purchases of Merchandise or Finished Goods 

Purchase Returns and Allowances (a decrease in expense 

and has a credit balance in the ledger) 
Freight and Cartage (on purchases of merchandise) 

Salesmen's Salaries and Commissions 

Salesmen's Expenses 

.Sales Office Expense 

Delivery Expense (repairs, wages, insurance, license for 
delivery purposes) 

Freight Out (on goods sold and shipped) 

Warehouse Expense 

Insurance on Merchandise 

Insurance on Sales Equipment 

Advertising 

Depreciation on Delivery Equipment 

Depreciation on Store Equipment 

3. General Administrative ^ 

Officers' Salaries 
Office Clerks' Salaries 
Telephone and Telegraph 
Postage 

Legal and Professional Expense 
Subscriptions and Dues 
Insurance on Office Equipment 
Depreciation on Office Equipment 



ACCOUNTS AND THEIR CLASSIFICATION 23 

CHART 2. (Continued) 
Cleaning 

Stationery and Office Supplies 
Taxes 

Heat (for offices) 
Light and Power (for offices) 
Rent (for offices) 
4. Incidental 

Interest on Notes Payable 

Interest on Bonds Payable 

Interest on Mortgage Payable 

Loss on Sale of Fixed Assets 

Cash Short and Over 

Sales Discount 

Uncollectible and Doubtful Accounts 

Questions 

1. What are the different types of business organizations in which 
ownership is reflected? 

2. Define an account. 

3. State the function of an account. 

4. In what book is the account to be found? 

5. Name five different general types of information recorded in 
accounts. 

6. Describe the form of an account. 

7. What are the two major groups of accounts in the account clas- 
sification? 

8. Name the subdivisions of accounts under the two major groups. 

9. What is meant by "assets"? 

10. Differentiate between current and fixed assets. 

11. Define an equity. Equities are divided into what groups? 

12. Describe what is meant by "ownership/ 7 

13. What is a liability? Why is it classed as an equity? 

14. What distinguishes a current liability from a long-term liability? 

15. What information is recorded in expense accounts? 

16. Income accounts record what information? 

17. What is the distinction between a personal and an impersonal 
account? 

18. State what is meant by selling or buying "on account/' 

19. An account receivable is classified under what account group? 
An account payable? 

20. What is the importdhce of the distinction between capital and 
operating accounts? 

21. What is the function of capital accounts? 

22. What is meant by the "ownership equation"? Discuss its sig- 
nificance. 

23. The ownership equation is present in what accounting statement? 



24 COST FINDING FOR ENGINEERS 

24. What is the function of operating accounts? 

25. Expense and income have what effect upon ownership? 

26. How is profit or loss from operation of a business determined? 

27. In what accounting statement is shown the profit or loss for any 
given period? 

28. What is meant by a "mixed" account? 

29. What factors must be taken into consideration before giving an 
account its title? 



CHAPTER III 

PRINCIPLES OF DEBIT AND CREDIT 

1. The Transaction. 

The business transaction was mentioned several times in 
relation to the account in Chap. II. In that chapter, the 
emphasis was on the account. The transaction now becomes 
the chief factor in developing the debit and credit principles. 
A business transaction is an exchange of values. 

A few examples of transactions will illustrate the defini- 
tion. When wages are paid, the management of the concern 
exchanges cash for services. When materials are purchased 
on account, the buyer exchanges his promise to pay for the 
merchandise. A cash investment of a concern just beginning 
business represents an exchange of cash for the owner's 
right or equity in the asset, Cash. Each transaction may be 
analyzed as to what is given or received by the business. 
Every transaction when analyzed represents either an increase 
or a decrease of some capital or operating account. 

Each transaction must be analyzed as above, before it can 
be recorded in the proper ledger accounts. The amount 
involved in the transaction is recorded as a debit and a credit 
in some of the asset, liability, ownership, income, or expense 
accounts. Certain principles determine which accounts are 
to be debited and which are to be credited. An excursion 
now will be taken* into the domain of these fundamental 
accounting principles. The principles and methods of debit 
and credit comprise the second important basis of introductory 
accounting. (See Principle No. 1, page 14.) 

2. Rules Underlying Debit and Credit Principles. 

The historical background of accounting has developed four 
fundamental rules. These rules comprise the foundation upon 
which is built the whole structure of accounting. These fun- 
damental rules are: 

1. The left-hand side of the account is termed the debit 
side; the right-hand side the credit. 

25 



26 COST FINDING FOR ENGINEERS 

2. Every transaction contains elements of debit and credit. 

3. In any business transaction the sum of the debits is 
equal to the sum of the credits. 

4. The sum of the debit balances in all accounts is always 
equal to the total of the credit balances in all accounts. 

3. Evolution of the Principle of Debit and Credit. 

Remember that every transaction must be broken down into 
its constituent parts to find whether it affects operating or 
capital accounts. When a business transaction takes place, 
which accounts shall be debited and which credited? This is 
the question that confronts every beginner in accounting. 
Certain transactions will be stated and analyzed in order to 
develop these principles of debit and credit. 

Transaction 1 

H. J. Finle^ decided to embark in the business of trading 
in mechanical drafting supplies and instruments. On Jan. 
6, he deposited in the Oldtown Savings and Trust Company 
$10,000 in cash to the credit of the bank account of Finley's 
business. 

Analysis. The cash in the business was increased from zero 
to $10,000. Likewise, Finley's equity in the assets of the 
business was increased from nothing to $10,000. The equity 
is the right to the cash which is invested. This transaction 
affects two capital accounts, as follows : 

Increase in assets (Cash). 

Increase in ownership (H. J. Finley, Capital). 

The relationship now existing in the business may be seen 
in what is termed the " ownership equation: 7 ' 

Assets = Rights to assets 
or 

Assets = Ownership 

This equation is the skeleton outline of the balance sheet. 
It would appear as follows : 

Assets = Ownership 



Cash $10,000 



H. J. Finley, Capital. . . . $10,000 



It would be necessary to prepare a new balance sheet 
with the occurrence of every transaction in order to reflect 
the ownership interest. The volume of daily transactions 



PRINCIPLES OF DEBIT AND CREDIT 



27 



precludes this practice in actual business. Hence, accounts 
are used to record the increases and decreases in assets, liabili- 
ties, ownership, incomes, and expenses. The accounts recording 
this transaction in the ledger are : 

(Debit) Cash (Credit) 



19 
























Jan. 


6 


H. J. Finley 




$10,000 


00 


















Capital In- 
























vestment 





















(Debit) 



H. J. Finley, Capital 



(Credit) 















19 
























Jan. 


6 


Cash In- 
























vestment 




$10,000 


00 



A question naturally arises after studying the above two 
accounts. Why does the Cash account have a debit balance, 
and Finley 's Capital account a credit balance? Why could 
the accounts not have just the opposite balances? Or why 
not show both accounts with debit balances or both with 
credit balances? Obviously, the latter would not be correct f 
It would violate the rule of equality of debit and credit nec- 
essary for every transaction. Answering the second question, 
a credit to Cash and a debit to H. J. Finley, Capital, does 
not run counter to the rule of debit and credit equality, 
but it does violate a principle of custom. A precedent has 
been set in the United States, whereby assets are always 
shown on the left-hand side of the balance sheet. The 
amount of cash shown in the balance sheet is taken from the .Cash 
account in the ledger. There is, then, uniformity and agree- 
ment in showing the amount of cash received and the balance 
on hand on the left-hand side of the account. Consequently, 
all increases in cash are shown as debits. Since cash is an 
asset it follows that the increase in any asset is similarly shown 
as a debit in the account. This is the base from which the 
line of reasoning is carried on for all other illustrative trans- 
actions in this chapter. Since the debit has been determined, 
there must be a credit. From the analysis made of this 
transaction, the credit represents an increase in the Finley's 
Capital account. 



28 COST FINDING FOR ENGINEERS 

General principles evolved: 

Asset accounts are debited when an asset is increased. 
Ownership accounts are credited when ownership is 
increased. 

Transaction 2 

Finley had placed a $5,000 order with the Engineer's 
Supply Company for paper, drawing materials, and tools. 
On Jan. 10 the shipment was received. Finley purchased 
the goods on terms of "net 30 days." Net 30 days means that 
no cash discount will be allowed for prompt payment, and that 
30 days may elapse before payment is made for the merchan- 
dise. Sometimes the terms are stated 1/10 n/30, which 
means that a cash discount of 1 per cent will be allowed if the 
invoice is paid within 10 days from its date. 

Analysis. Finley became obligated to the Engineer's 
Supply House for $5,000 since the latter has sold on account, 
i.e., extended 30 days credit. After the goods are delivered, 
they become Finley's property, but the Engineer's Supply 
Company has an equity in the assets of Finley's business 
until their invoice is paid in full. This creditor has a 
right to receive payment for the goods it sold on credit. 
This right or equity is termed a liability of Finley's busi- 
ness. The liability was increased from, nothing before 
the goods were delivered to $5,000 after their reqeipt. 

When the stock-in-trade was received on Jan. 10, it may be 
considered, temporarily, as an asset. It represents property 
of Finley '& business, a value owned. But the purpose of 
buying the stock of goods was to sell again at a profit. When 
sold, the cost represents an expense, or it is termed the cost of 
goods sold. This is an illustration of a mixed account. 
The purchase is considered as an increase in expense in 
recording the transaction in the ledger. This transaction 
shows a mixed account (treated as an operating account) 
and a capital account as follows: 

Increase in expense (Purchases). 

Increase in liability (Engineer's Supply Company). 

The ownership equation is now expanded as a result of 
this transaction: 

From (Assets = Rights to assets) 

m /A * T-. -x- /Liabilities 
To (Assets - Equities<; 0wnership 



PRINCIPLES OF DEBIT AND CREDIT 



29 



This equation is reflected in the ledger where the accounts 
record the illustrative transactions mentioned. The partic- 
ular accounts affected by this transaction are shown below: 

(Debit) Purchases (Credit) 



19 
























Jan. 


10 


Engineer's 
























Supply Co. 




$5,000 


00 















(Debit) 



Engineer's Supply Company 



(Credit) 















19 
Jan. 


10 


Purchases 




$5,000 


00 



General principles evolved: 

Expense accounts (including mixed accounts combining 

elements of asset and expense accounts) are debited when 

expense is increased. 

Liability accounts are credited when a liability is 

increased. 

Transaction 3 

Finley sent a check on Jan. 25, for $3,000 to the Engineer's 
Supply Company to apply on account. Payment of the 
balance was held up pending the return of some goods which 
Finley declared were of inferior quality. 

Analysis. Making a payment of $3,000 decreases Finley's 
cash by that amount, hence a decrease in his assets. The 
payment to the Engineer's Supply Company decreases the 
amount owed to them by $3,000. This transaction illus- 
trates : 

Decrease in an asset (Cash) 

Decrease in a liability (Engineer's Supply Company). 
The accounts in the ledger now appear as follows : 



(Debit) 



Cash 



(Credit) 



19 












19 












Jan. 


6 


Finley In- 








Jan. 


25 


Engineer's 












vestment 




$10,000 


00 






Supply 
























Co. 




$ 3,000 


00 



30 COST FINDING FOR ENGINEERS 


(Debit) - H. J. Finley, Capital (Credit) 














19 
Jan. 


6 


Cash 




$10,000 


00 



(Debit) 



Engineer's Supply Company 



(Credit) 



19 
Jan. 


25 


Cash 




$ 3,000 


00 


19 
Jan. 


10 


Purchases 




$ 5,000 


00 



(Debit) 



Purchases 



(Credit) 



Jan. 


10 


Engineer's 
























Supply 
























Co. 




$ 5,000 


00 















All of the rules of debit and credit have been adhered to 
consistently. Each of the three transactions has a debit 
and credit; each debit amount equals the credit amount; 
and the sum of all the debit balances in the accounts is equal 
to the total of the credit balances in the accounts. 
General principles evolved: 

Asset accounts are credited when an asset is decreased. 
Liability accounts are debited when a liability is 
decreased. 

Transaction 4 

Finley had to pay a hospital bill of $500 on Jan. 27 for 
Mrs. Finley. Not having sufficient funds in his personal 
bank account, a check on the business account was written 
for the amount. 

Analysis. The asset, cash, was decreased by the amount 
of the payment. No value was received by the business 
in return for the $500 cash expenditure. And the personal 
expense is not an expense of the business. Rather the $500 
represents a decrease of Finley 's capital investment. Any 
withdrawal of cash or merchandise should be recorded in a 
supplementary ownership account termed "H. J. Finley, 
Personal." To provide for additional investments of cash 
or other assets, it is better to make use of the ownership 



PRINCIPLES OF DEBIT AND CREDIT 



31 



account labeled "H. J. Finley, Capital." The personal 
account is used to debit withdrawals. The value of the 
personal supplementary ownership account will be appreciated 
in connection with the preparation of statements in Chap. X. 
The transaction is analyzed as follows: 

Decrease in an asset (Cash). 

Decrease in ownership (H. J. Finley, Personal). 

The ledger accounts now appear as follows : 



(Debit) 



Cash 



(Debit) 



Engineer's Supply Company 



(Credit) 



1$ 












19 












Jan. 


6 


Finley In- 








Jan. 


25 


Engineer's 












vestment 




$10,000 


00 






Supply 
























Co. 




$ 3,000 


00 
















27 


Finley 
























Personal 




500 


00 


(Debit) H. J. Finley, Capital (Credit) 














19 
























Jan. 


6 


Cash 




$10,000 


00 


(Debit) H. J. Finley, Personal (Credit) 


19 
























Jan. 


27 


Cash 




500 


00 















(Credit) 



19 












19 












Jan. 


25 


Cash 




$ 3,000 


00 


Jan. 


10 


Purchases 




$ 5,000 


00 


(Debit) Purchases (Credit) 


19 
























Jan. 


10 


Engineer's 




$ 5,000 


00 


















Supply 
























Co. 





















32 



COST FINDING FOR ENGINEERS 



General principle evolved: * 

Ownership accounts are debited when ownership is 

decreased. 
General principle restated: 

Asset accounts are credited when an asset is decreased. 

Transaction 5 

Finley received a credit memorandum from the Engineer's 
Supply Company for $500, the value of the goods which he 
returned to them on Jan. 28. 

Analysis. In returning goods valued at $500 to the Engi- 
neer's Supply Company, Finley 's liability to them is decreased 
by that amount. Likewise, the net purchase is reduced to 
$4,500 or $500 less than the amount of the original invoice. 
This is equivalent to a decrease in expense. The analysis 
of the transaction is as follows : 

Decrease in an expense (Purchases). 

Decrease in a liability (Engineer's Supply Company). 

A separate account is opened to record the value of the 
purchases returned. It is a supplementary account to the 
Purchases account. In this supplementary account are 
recorded all allowances on or return of goods purchased. In 
this manner the Purchases account will always show the 
amount of gross purchases. This figure is of importance for 
use in the statement of income, profit and loss. 

The accounts in the ledger now appear as follows : 



(Debit) 



Cash 



(Credit) 



19 












19 












Jan. 


6 


Finley In- 








Jan. 


25 


Engineer's 












vestment 




$10,000 


00 






Supply 
























Co. 




$ 3,000 


00 
















27 


Finley, 
























Personal 




500 


00 



(Debit) 



H. J. Finley, Capital 



(Credit) 















19 
Jan. 


6 


Cash 




$10,000 


00 



PRINCIPLES OF DEBIT AND CREDIT 33 

(Debit) H. J. Finley, Personal (Credit) 



19 
Jan. 


27 


Cash 




$500 


00 















(Debit) 



Engineer's Supply Company 



(Debit) 



Purchases 



(Debit) 



Purchase Returns and Allowances 



(Credit) 



19 












1& 












Jan. 


25 


Cash 




$3,000 


00 


Jan. 


10 


Purchases 




$5,000 


00 




28 


Purchase 
























Returns 




500 


00 















(Credit) 



19 
























Jan. 


10 


Engineer's 
























Supply 
























Co. 




$5,000 


00 















(Credit) 















19 
























Jan. 


28 


Engineer's 
























Supply 
























Co. 




$500 


00 



General principle evolved: 

Expense accounts are credited when expense is decreased. 
General principle restated: 

Liability accounts are debited when a liability is 

decreased. 

Transaction 6 

On Jan. 28, Finley made a $600 sale to C. C. Winks on 
account, terms net 30 days. Finley marked the goods he 
purchased to sell uniformly at a profit of 66% per cent on 
the selling price, therefore the cost of the sale was $200, and 
the gross profit was $400. 

Analysis. This transaction is different from the preceding 
ones in that profit enters into consideration. Finley has 
received Winks' promise to pay in 30 days. The customer's 



34 



COST FINDING FOR ENGINEERS 



promise is an account receivable. Finley owns the right to 
receive payment from Winks. This right is a personal 
property, hence an asset. Therefore, the assets have been 
increased by $600. 

The sales made by any trading or manufacturing concern 
form the chief source of their income. It matters not whether 
sales are made for cash or on credit. A sale creates income. 
In this transaction the income has increased by $600. An 
analysis of the transaction is : 

Increase in an asset (C. C. Winks, an account receivable). 

Increase in income (Sales). 

After recording this transaction the accounts in the ledger 
would appear as follows: 



(Debit) 



Cash 



(Credit) 



19 












19 












Jan. 


6 


Finley In- 








Jan. 


25 


Engineer's 












vestment 




$10,000 


00 






Supply 
























Co. 




$3,000 


00 
















27 


Finley, 
























Personal 




500 


00 



(Debit) 



H. J. Finley, Capital 



(Credit) 















19 
Jan. 


6 


Cash 




$10,000 


00 



(Debit) 



H. J. Finley, Personal 



(Credit) 



19 
Jan. 


27 


Cash 




$500 


00 















(Debit) Engineer's Supply Company (Accounts Payable) (Credit) 



19 












19 












Jan. 


25 


Cash 




$3,000 


00 


Jan. 


10 


Purchases 




$5,000 


00 




28 


Purchase 
























Returns 




500 


00 















PRINCIPLES OF DEBIT AND CREDIT 35 

(Debit) Purchases (Credit) 



19 
























Jan. 


10 


Engineer's 
























Supply 
























Co. 




$5,000 


00 















(Debit) 



Purchase Returns and Allowances 



(Credit) 















19 
























Jan. 


28 


Engineer's 
























Supply 
























Co. 




$500 


00 



(Debit) 



C. C. Winks (Accounts Receivable) 



(Credit) 



19 
Jan. 


28 


Sales 




$600 


00 















(Debit) 



Sales 



(Credit) 















19 
























Jan. 


28 


C. C. 
























Winks 




$600 


00 



As sales are made the income is recorded in a Sales account. 
A final summary between the sales and the cost of sales is 
then made periodically monthly, quarterly, semiannually, 
or annually. This is accomplished by setting up a statement 
of income, profit and loss. If such a statement were to be 
prepared at this time it would appear as follows: 

Sales $600 00 

Cost of Sales: 

Purchases $5 ,000 00 

Less: Purchase Returns 500 00 

Net Purchases $4,500 00 

1 Inventory, Jan. 29, 19 4,300 00 

Cost of Goods Sold 7777777. 200 00 

Gross Profit $~l(xf 00 

1 The inventory value of $4,300 at Jan. 28 is reached in the following manner. 
The net cost of the purchases was $4,500. The cost of the goods sold was $200. The 
difference between the cost of the goods available for sale ($4,500) and the cost of goods 
sold ($200) equals the value of the goods remaining unsold ($4,300). 



36 COST FINDING FOR ENGINEERS 

Arriving at the value of the new inventory is not such a 
simple procedure in a going concern, although the general 
principle is the same. A perpetual inventory record may be 
maintained, or the Gross Profit Method may be employed to 
obtain the closing inventory value. Both of these methods 
are described in Chap. XIX. In the absence of either of 
these methods the closing inventory value may be ascertained 
by actual count. Counting, weighing, or measuring each unit 
is termed " taking a physical inventory." The unit count, 
in turn, is usually priced at cost or market, whichever is 
lower. 

The question is often raised why the income account has a 
credit balance. Trading is carried on with the intent of 
making a profit. A gross profit results when income from 
sales exceeds the cost of the sales. This gross profit tends 
to increase ownership. One of the debit and credit principles 
evolved was that increases in ownership are credited. Since 
gross profit results from sales, and profits tend to increase 
ownership, sales and ownership have a credit balance in 
common. 

General principle evolved: 

Income accounts are credited when income is increased. 

General principle restated: 

Asset accounts are debited when an asset is increased. 

Transaction 7 

C. C. Winks requested a credit memorandum for $25, 
covering paper damaged in shipment to him. Finley granted 
this allowance on Jan. 30. 

Analysis. An allowance of $25 made to Winks decreases 
the amount he owes to Finley to $575. The asset or the 
account receivable has been decreased by $25. The allowance 
being made on the goods which were sold represents a decrease 
in income. The gross income of $600 has been reduced to a 
net income of $575 as a result of the $25 allowance. The 
analysis is as follows: 

Decrease in an asset (C. C. Winks). 

Decrease in income (Sales Returns and Allowances). 

A separate account is opened to provide for sales returned 
and allowances made on sales. For the purpose of ascer- 



PRINCIPLES OF DEBIT AND CREDIT 



37 



taining gross sales, the Sales account is used to record sales 
only. The Sales Returns and Allowances account is a 
supplementary account to the Sales account. The accounts 
necessary to record this transaction are : 



(Debit) 



C. C. Winks 



(Credit) 



19 












19 












Jan. 


28 


Sales 




$600 


00 


Jan. 


30 


Sales Al- 
























lowances 




$25 


00 



(Debit) 



Sales Returns and Allowances 



(Credit) 



19 
Jan. 


30 


C. C. Winks 




$25 


00 















(Debit) 



Sales 



(Credit) 















19 
























Jan. 


28 


C. C. 
























Winks 

* 




$600 


00 



General principle evolved: 

Income accounts are debited when income is decreased. 
General principle restated: 

Asset accounts are credited when an asset is decreased. 



Transaction 8 

Finley paid $200 for salaries to his clerks for the month 
ended Jan. 31. 

Analysis. The asset, cash, has been decreased by $200. 
The payment of salaries and wages constitutes a cost of oper- 
ating the store, hence an expense has been increased. The 
effect on the accounts is as follows : 

Increase in an expense (Store Salaries). 

Decrease in an asset (Cash). 

The accounts affected by this transaction are: 



38 COST FINDING FOR ENGINEERS 


(Debit) Store Salaries (Credit) 


19 

Jan. 


31 


Cash 




$200 


00 















(Debit) 



Cash 



(Credit) 















19 
























Jan. 


31 


Store 
























Salaries 




$200 


00 



Invariably the question arises as to why expense accounts 
have debit balances. The answer is quite obvious, when it is 
remembered that expense accounts record changes in owner- 
ship temporarily. Every expense of the business incurred 
tends to decrease ownership, just as the increase in income 
tends to increase ownership. With the increase of each item 
of expense, the effect upon the owner's capital is that of 
decreasing it, which would mean a debit to the account. 
Debits to the owner's Capital account for all items of expense, 
however, would defeat the principle of adequate control 
through detailed records. Instead of debiting the owner's 
Capital account with each expense, specific expense accounts 
for each different class of expense are debited, and periodically 
they are summarized in the statement of income, profit and 
loss to show their combined effect upon the Capital account. 

General principle evolved: 

Expense accounts are debited when expense is increased. 

General principle restated: 

Asset accounts are credited when an asset is decreased. 

4. The Debit and Credit Table. 



A review of the eight preceding illustrative transactions 
definitely establishes the principle that every transaction 
represents either an increase or a decrease in a capital or an 
operating account. The principles developed in the preceding 
transactions may be seen in summary form (Chart 3). 



PRINCIPLES OF DEBIT AND CREDIT 



CHART 3. SUMMARY OF EIGHT PRECEDING ILLUSTRATIVE TRANSACTIONS 
Debit Credit 



Illustrative Transaction: 
1 Increase in Assets 



Decrease in Liabilities 



6 

5\ 



4 Decrease in Ownership 
7 Decrease in Income 

2\ 



> 
J 



Increase in Expense 



Illustrative Transaction: 
3 



Decrease in Assets 

Increase in Liabilities 
Increase in Ownership 
Increase in Income 
Decrease in Expense 



A more general table may be prepared from the summary 
see (Chart 4). 

CHART 4. DEBIT AND CREDIT TABLE 
Debit Credit 



Increase in Assets 
Decrease in Liabilities 
Decrease in Ownership 
Decrease in Income 
Increase in Expense 



Decrease in Assets 
Increase in Liabilities 
Increase in Ownership 
Increase in Income 
Decrease in Expense 



The necessity for understanding this table is of tremendous 
importance. Knowing it and how to make application of it 
is an essential prerequisite to the understanding of accounting. 
Use is made of the principles set forth in this table with 
the occurrence of every transaction. The importance attached 
to it carries through the entire accounting process from record- 
ing the transactions to the preparation of the financial 
statements. If proper applications of the debit and credit 
principles, are not made in recording the transactions, the 
statements, then, reflect the errors. And the purpose of an 
accounting system is defeated if the statements reflect 
inaccurate figures. 

6. Restating the Purpose of the Account. 

The preceding illustrative transactions have shown that 
the account records the changes relative to ownership. Each 
change in an operating account affects the owner's Capital 



40 



COST FINDING FOR ENGINEERS 



account. Since it is impractical to prepare a new balance 
sheet with the occurrence of each transaction, the ledger 
accounts summarize the changes. Periodically the balance 
sheet and the statement of income and profit and loss are 
prepared from a summary of the ledger accounts. In other 
words the owner's Capital account is adjusted at the close 
of each fiscal period. 

Statements that show the condition of the business of H. J. 
Finley are now prepared from the following ledger accounts 
which record the transactions for the montli of January. 
(NOTE: The figures in parentheses refer to the preceding 
illustrative transactions.) 



(Debit) 



Cash 



(Credit) 



(i) 



Jan. 


6 


Finley Invest- 








Jan. 


25 


Engineer's Sup- 














ment 




$10,000 


00 






ply Co. 




$3,000 


00 


(3) 
















27 


Finley, Personal 




500 


00 


(4) 
















31 


Store Salaries 




200 


00 


(8) 



(Debit) 



H. J. Finley, Capital 



(Credit) 















19_ 
Jan. 


6 


Cash 




$10,000 


00 



(1) 



(Debit) 



H. J. Finley, Personal 



(Credit) 



(4) 



19_ 
Jan. 


27 


Cash 




$500 


00 















(Debit) 



Engineer's Supply Company 



(Credit) 



(3) 
(5) 



Jan. 


25 


Cash 




$3,000 


00 


Jan. 


10 


Purchases 




$5,000 


00 




28 


Purchase Re- 
























turns 




500 


00 















(2) 



(Debit) 



Purchases 



(Credit) 



(2) 



Jan. 


10 


Engineer's Sup- 
ply Company 




$5,000 


00 


| 













PRINCIPLES OF DEBIT AND CREDIT 41 

(Debit) Purchase Returns and Allowances (Credit) 



(5) 















Jan. 


28 


Engineer's Sup- 
ply Company 




$500 


00 



(Debit) 



C. C. Winks 



(6) 



(Debit) 



Sales 



(Debit) 



Sales Returns and Allowances 



(7) 



(Debit) 



Store Salaries 



(8) 



FORM 7 
H. J. FINLEY 

STATEMENT OF INCOME, PROFIT AND Loss 
Jan. 6, 19 to Jan. 31, 19_ 



(Credit) 



Jan. 


28 


Sales 




$600 


00 


Jan. 


30 


Sales Allow- 
ance 




$25 


00 



(7) 



(Credit) 















Jan. 


28 


C. C. Winks 




$600 


00 



(6) 



(Credit) 



19__ 
Jan. 


30 


C. C. Winks 




$25 


00 
















(Credit) 



19__ 
Jan. 


31 


Cash 




$200 


00 















Sales $ 600 .00 

Less: Sales Returns and Allowances 25.00 

Net Sales $575.00 

Cost of Sales: 

Purchases $5,000.00 

Less: Purchase Returns and 

Allowances 500.00 

Net Purchases 4,500.00 

Inventory, Jan. 31, 19 4,300.00 

Cost of Goods Sold 200.00 

Gross Profit $375.00 

Expenses: 

Store Salaries 200.00 

Net Profit (increasing ownership) $175.00 



42 COST FINDING FOR ENGINEERS 

6. The Statement of Income, Profit and Loss. 

The statement of income, profit and loss (Form 7) shows the 
profit resulting from buying and selling goods for the'month 
of January. Only operating accounts, namely, expenses and 
incomes, are used in its preparation. The $175 net profit 
for the month increases Finley's investment or capital by 
that amount. These operating accounts have temporarily 
recorded the changes in ownership during the period. At 
Jan. 31, they are summarized to ascertain whether a loss or 
gain has resulted from operations. 

7. The Statement of Ownership. 

The statement of ownership (Form 8) shows the factors 
which have brought about the difference in net worth from 
the beginning to the end of the 1-month period. Finley's 
investment at the beginning of the period was $10,000. It was 
decreased by a $500 withdrawal. It might also have been 
decreased by a loss from operations. Since a profit of $175 
was made for the month, the investment was increased by 
that figure. Had Finley made any additional cash or prop- 
erty investment, it would have served to increase his ownership 
at the close of the period. 

The statement of ownership is the connecting link between 
the statement of income, profit and loss, and the balance 
sheet. The ownership interest -at the close of the period 
(the last item in the statement of ownership) is the figure 
used in the balance sheet under the caption of H. J. Finley, 
Capital. 

FORM 8 
H. J. FINLEY 
STATEMENT OF OWNERSHIP 
Jan. 6, 19 to Jan. 31, 19 

Owner's Investment, Jan. 6, 19 $10,000.00 

Withdrawal of Investment (cash) 500.00 

Net Investment 9,500.00 

Profit from Operations 175 . 00 

Owner's Investment, Jan. 31, 19 $ 9,675.00 



PRINCIPLES OF DEBIT AND CREDIT 



43 



8. The Balance Sheet. 

The balance sheet portrays the financial condition of 
Finley's business at Jan. 31, 19 . Capital accounts only 
are used in its preparation. The assets of the business total 
$11,175. The business owes creditors $1,500. The difference 
between the assets and liability is $9,675, which represents 
Finley's ownership. This is the figure which was determined 
in the statement of ownership. In the balance sheet may be 
seen also the existence of the ownership equation. The 
total value of the assets minus the total value of the liabilities 
equals the ownership interest. Or the asset values equal 
the liability values plus the ownership interest. 

FORM 9 

H. J. FINLEY 

BALANCE SHEET 

Jan. 31, 19 
Assets Liabilities and Ownership 



Current: 

Cash $ 6,300.00 

Accounts Receivable: 

C. C. Winks 575.00 

Inventory of Mer- 
chandise 4,300.00 



$11,175.00 



Current Liabilities : 
Accounts Payable: 
Engineer's Sup- 
ply Co $1,500.00 

Ownership: 

II. J. Finley, Capi- 
tal 9,675.00 

$11,175.00 



In developing the principles of debit and credit, the indi- 
vidual proprietorship type of business organization was used. 
The fundamental accounting principles are the same for all 
forms of business, regardless of the type of business organiza- 
tion, whether it be sole proprietorship, a partnership, or a 
corporation. 

There are important technical activities which must be 
performed to bridge the gap between the debit and credit 
principles and the preparation of accounting statements. They 
are described under separate headings, namely : 

1. Recording plant transactions. 

2. Ledger operations. 

3. Preparation of working papers. 

4. Adjustments for accruals, prepayments, depreciation, 



44 COST FINDING FOR ENGINEERS 

Questions 

1. What is meant by a business transaction? 

2. Give some illustrations of business transactions. 

3. What record is made of the values represented in each business 
transaction? 

4. An analysis of every business transaction reveals what effect upon 
the capital or operating accounts? 

5. State the four fundamental rules of debit and credit underlying 
accounting. 

6. What name is given to the left-hand side of the account? To the 
right-hand side? 

7. When is an asset account debited ? 

8. When is an ownership account credited? 

9. What is the simplest form of stating the ownership equation? 

10. State the necessity for using accounts to record business trans- 
actions. 

11. Describe the function of the Purchases account. 

12. When is an expense account debited? 

13. When is a liability account credited? 

14. When is an asset account credited? 

15. When is a liability account debited? 

16. When is an ownership account debited? 

17. What is the purpose of the owner's Personal account? 

18. When is an expense account credited? 

19. State the significance of having a separate account to record re- 
turns of and allowances on purchases. 

20. Give a detailed analysis of a sales transaction. 

21. In what manner is the profit on sales ascertained in actual practice? 

22. When is an income account credited? Debited? 

23. WTiy does an income account have a credit balance? 

24. Why is it considered good practice to record in a separate account 
returns of and allowances on sales? 

25. Why does an expense account have a debit balance? 

26. What is the value of knowing the debit and credit table? 

27. Of what importance are the ledger accounts? 

28. What function is performed by each of the following: 

a. Statement of income, profit and loss? 

b. Statement of ownership or capital? 

c. Balance sheet? 



CHAPTER IV 
RECORDING PLANT TRANSACTIONS 

1. The Inadequacy of the Ledger. 

The use of ledger accounts was developed in Chap. III. 
The need for other books of record, particularly those found 
in the plant, is now considered. In the ledger the transactions 
are split into their component elements of debit and credit. 
The debits and credits are recorded under variously labeled 
accounts as assets, liabilities, ownership, expenses and incomes. 
Such a record by itself is inadequate because: 

1. There is no chronological record of the daily trans- 
actions. Such a record is invaluable for future reference. 

2. A complete record of the transaction, the debit and 
credit, cannot be seen as a whole. 

3. It is frequently impossible to show a complete explana- 
tion for the transaction in the ledger. 

4. In a large plant so many, business transactions take 
place that it would be a physical impossibility to record the 
transactions directly in the ledger. 

These disadvantages may be avoided. In practice the 
.transactions are first recorded in a book known as the journal. 
To classify effectively the business transactions several 
journals are used. Those found in most frequent use are: 

1. The Cash Receipts Journal. 

2. The Cash Disbursements Journal. 

3. The Sales Journal. 

4. The Purchase Journal or Voucher Register. 

5. The General Journal. 

There is no standard form for the journal. The most 
common ruling, however, is shown below: 



46 



COST FINDING FOR ENGINEERS 
FORM 10. TWO-COLUMN JOURNAL 



Journal Page No. 

(Debit) (Credit) 










L 










Date 




Nameof Accounts 


Explanation 


e 


Amou 


nt 


Amou 


nt 










d 


















g 



















e 


















r 


















F 


















o 


















1 


















i 


















o 











The use made of the various columns is inserted within the 
above form, making them self-explanatory. 

2. Procedure in Recording Transactions. 

It is highly important to learn how to record transactions 
correctly in the books of original entry. This process is 
termed " journalizing. " There is an accounting maxim which 
says: "A good journalizer, a good accountant. " Journalizing 
is the beginning of the accounting process. If the transaction 
is handled correctly in the inital stage, its ultimate effect upon 
ownership will be properly reflected. A clear understanding 
of the transaction is the first requisite before recording in the 
journal. Logical reasoning must be employed in analyzing the 
transaction. The transaction should always be analyzed from 
the owner's point of view. In this manner the debit and credit 
may be ascertained with the possibility of errors reduced to a 
minimum. 

An analysis of any transaction requires an adequate knowl- 
edge of the classification of accounts. This is necessary in 
order to know what group of accounts is involved. For 
every transaction the student should ask himself the following 
questions. What has been increased or decreased, a capital 
account or an operating account? If the former, was it an 
asset, a liability, or ownership? If the latter, was it an 



RECORDING PLANT TRANSACTIONS 47 

expense or income? Even with these questions satisfactorily 
answered, the analysis is not complete. The student must 
also be familiar with the names of the most common accounts 
for assets, liabilities, ownership, expenses and incomes. 
(Refer to Chart 2, Chap. II.) Perhaps a new name will have 
to be coined to record properly the debit or credit for the 
transaction. Always strive to use a concise and specific 
account title if such is the case. At the same time the rule 
of reason should apply, in order that the classification will 
not be too intricate. Should the occasion arise for recording 
the cost value of four turret lathes, a planer, two drill presses, 
and a multiple punch, it would not be necessary to open eight 
different accounts. One account for Machinery would suffice, 
in which would be recorded the cost value of each piece. 
After the analysis has disclosed what accounts have been 
affected, and whether the effect is to increase or decrease 
them, the debit and credit table should then be consulted. 
The principles developed and set forth in Chart 4 will aid in 
ascertaining whether the account should be debited or credited. 

3. Importance of Correct Analysis. 

The debits and credits recorded in the books of original 
entry ultimately appear in the statement of income, profit 
and loss, statement of ownership and the balance sheet. If 
the debits and credits are erroneously recorded, the statements 
will reflect the errors. Incorrect analysis of transactions, 
therefore, means a misstatement of ownership. To avoid the 
possibility of incorrect analysis, emphasis is again placed upon 
the ability to differentiate between capital and operating 
accounts. 

4. Capital and Operating Expenditures. 

An expenditure does not necessarily mean an immediate 
outlay of cash. The purchase of a delivery truck on a 12- 
month payment plan constitutes an expenditure. The 
purchase of fuel and power, and payment of wages are also 
expenditures. Either the present or future outlay of cash 
for an asset or an expense is considered an expenditure. 
The influence upon the periodic statements and ultimately 
upon the ownership account reverts to the manner in which 
expenditures were recorded in the books of original entry. 



48 COST FINDING FOR ENGINEERS 

Capital expenditures and operating expenditures must not 
be confused. 

Capital expenditures are made for additions, betterments, 
improvements, and replacements of fixed assets. An expendi- 
ture that increases the value or productivity of a fixed asset 
is considered a capital expenditure. An expenditure should 
be capitalized when the business will receive the benefit 
from it for more than one accounting or fiscal period. 

Operating expenditures are those incurred for the main- 
tenance of a fixed asset or for current operations. Such 
expenditures do not increase the value of any asset. Repairs 
may be made in order to maintain the machinery at its max- 
imum or ordinary degree of efficiency. Such an expenditure 
does not increase the value of the machine. Operating 
expenditures are treated as expenses. 

What definitely happens when the two types of expendi- 
tures are confused? A capital expenditure debited to an 
expense account causes expense to be overstated with a 
resultant understatement of profit and ownership. On the 
other hand, if an operating expenditure is debited to an 
asset account, expense is understated. This causes profits 
to be overstated, and, accordingly, ownership is overstated. 
Again, beware of confusing the two types of expenditures 
when analyzing and journalizing the transaction. 

5. Sorting the Transactions. 

The nature of the transaction determines the book in 
which it is first recorded. The transaction is entered in the 
cash receipts journal if cash has been received in the business. 
All payments of cash are entered in the cash disbursements 
journal. In the sales journal are recorded all sales on account 
to customers. Only the purchase of materials or stock-in- 
trade is recorded in the purchase journal. Transactions 
which cannot be classified under any of these four groups 
are recorded in the general journal. 

4 

6. The Cash Receipts Journal. 

Transactions involving the receipt of cash are entered in 
the cash receipts journal. Some of the more common sources 
of cash receipts are: 

1. Capital contributions by owner. 



RECORDING PLANT TRANSACTIONS 



49 



2. bale of goods for cash. 

3. Payment received on account from customers. 

4. Receipt of payment on a note receivable. 

5. Commissions received. 

6. Rentals received. 

7. Interest on notes receivable and bank deposits. 

Every entry in the cash receipts journal implies that 
cash has been increased because of the entry in this par- 
ticular book. The implication thereby eliminates the neces- 
sity of writing the word "cash" as a part of each entry. 
Only the source of the receipt is named in the account column, 
with suitable explanation and the amount in the proper 
columns. 

An illustration of a cash receipts journal is shown below. 
In the upper left-hand corner of the page "CR1" denotes the 
page number of the journal. 

FORM 11 



Cash Receipts Journal CR1 

(Debit) (Credit) 


Jan. 


6 


H. J. Finley, Cap- 


Original invest- 
















ital 


ment 








$10,000 


00 




31 


Cash (Dr.) 






$10,000 


00 






Feb. 


8 


Sales 


Cash sales for the 


















week ended 


















today 








$ 175 


00 




15 


Sales 


" 








450 


00 




22 


Sales 


u 








500 


00 




27 


C. C. Winks 


On account 








575 


00 




28 


Sales 


Cash sales for the 


















week ended 


















today 








844 


00 




28 


Cash (Dr.) 






$ 2,544 


00 







The receipt of cash naturally arises from some source. 
The name of the source is invariably entered as the name 
of the account. Cash received from a customer in payment 
of an account is entered opposite the customer's name in the 
account column. The receipt of income bears the name of 



50 COST FINDING FOR ENGINEERS 

the account in accordance with its nature, namely, Sales, 
Commissions Earned, Interest Received, etc. 

The total of all items entered in the cash receipts journal 
represents the receipt of and increase in the asset, cash. The 
total cash received during the month of February, in the above 
illustration, was $2,544. Jhis amount will appear in the Cash 
account as a debit, being an increase in the asset, cash. 

The individual amounts totaling $2,544 represent credits 
to the respective accounts named in the account column. 
Thus the equality of debit and credit is maintained in the 
ledger. The total of the four entries for sales, amounting to 
$1,969, is an increase in income. The credit of $575 to C. C. 
Winks is a decrease in an asset. 

There are several rules to remember in recording trans- 
actions in the cash receipts journal: 

1. Always list the individual amounts of the cash received 
in the right-hand money column. 

2. Show only totals and balances in the left-hand money 
column. 

3. Leave no space blank in the money column. If no figures 
are required, draw a line through the space. This prevents 
the insertion of fictitious amounts for fraudulent purposes. 

4. Rulings for the cash receipts journal should be as follows, 
at the close of the month : 

a. A single line across the right-hand money column only. 

6. After the total is placed in the left-hand money 
column, a double line should be ruled across both 
money columns and the ledger folio column. After a 
break in the line across the account and explanation 
columns, the double line should be continued across 
the date column. The purpose of the double line is 
to portray clearly the transactions occurring in any 
one month. 

7. The Cash Disbursements Journal. 

All transactions pertaining to the payment of cash are 
recorded in this journal. The payment of cash is always 
made for some expense or asset, or to decrease a liability, 
ownership, or income. Some illustrations of items appearing 
in the cash disbursement^ journal are listed below: 



RECORDING PLANT TRANSACTIONS 



51 



1. Payment to creditor (accounts payable) on account. 

2. Payment for expense items purchased for cash, such as: 
a. Salaries and wages. 

6. Rent and taxes. 

c. Telephone, light, heat and power. 

d. Expense and supplies for office, store and delivery 
equipment. 

3. Cash withdrawals by owner. 

4. Payment for fixed assets purchased by cash. 

Each entry in the cash disbursements journal implies 
that cash has been paid out or decreased. A knowledge of 
this fact makes it unnecessary to write the word "cash" each 
time an entry is recorded. The purpose for which payment is 
made is written as the name of the account to be charged in 
the " account " column. A model form of this journal may 
be seen below. 

FORM 12 



f^T^1 

Cash Disbursements Journal .... ~ ~.! A . 

(Debit) (Credit) 


19 


















Jan. 


25 


Engineer's Supply 


















Co. 


On account 




$3,000 


00 








27 


H. J. Finley, Per- 


















sonal 


Personal use 




500 


00 








31 


Store Salaries 


Clerks for month 




200 


00 








31 


Cash (Cr.) 










$3 , 700 


00 


Feb. 


1 


Rent 


Penn Realty for 


















January and 


















February 




$ 250 


00 








3 


Store Expense 


Telephone for 


















January 




4 


00 








6 


Furniture and Fix- 


















tures 


Cash register 




225 


00 








13 


Store Expense 


Electric power 




18 


00 








17 


Purchases 


Drawing pens 




27 


00 








18 


India Ink Co. 


Account in full 




147 


00 








23 


Office Expense 


Stationery 




14 


00 








28 


Store Salaries 


Clerks' salaries 




200 


00 








28 


Office Salaries 


Bookkeeper 




80 


00 








28 


Notes Payable 


Engineer's Sup- 


















ply Co. 




1,500 


00 








28 


Interest Expense 


On above note 




7 


50 








28 


Cash (Cr.) 








_ 


$2,472 


50 



52 COST FINDING FOR ENGINEERS 

The name placed in the account column should be the name 
of the account to be debited, and not necessarily the party to 
whom the cash payment is made. Rent was paid to the 
Penn Realty Company, but their name should not appear 
in the account column. The point of importance is that an 
expense has been incurred. The nature of the expense is 
rent, and its cost is placed in an account bearing such a 
caption. 

The sum of all the individual items entered in the cash 
disbursements journal is the amount of cash disbursements. 
The cash disbursed in January totaled $3,700 and in February 
$2,472.50. These totals represent credits to the asset Cash, 
since the cash was decreased by that amount. 

Each individual disbursement constitutes a charge or debit 
to the account named in the account column. The debits 
may be analyzed in terms of the debit and credit table as 
follows: 

Engineer's Supply Co $3,000.00, decrease in a liability. 

H. J. Finley, Personal 500 . 00, decrease in ownership. 

Store Salaries 200.00, increase in expense. 

Rent 250 .00, increase in expense. 

Store Expense 4 . 00, increase in expense. 

Furniture and Fixtures 225 . 00, increase in asset. 

Purchases 27 . 00, increase in expense. 

India Ink Company 147.00, decrease in liability. 

Office Expense 14.00, increase in expense. 

Store Salaries 200 . 00, increase in expense. 

Office Salaries 80 . 00, increase in expense. 

Notes Payable 1 , 500 . 00, decrease in liability. 

Interest Paid , 7 , 50, increase in expense. 

8. The Purchase Journal. 

Only the purchase of merchandise on account, which is to be 
sold again, is recorded in this journal. The purchase of items 
of expense or fixed assets on account are 'not recorded in this 
book, but are recorded in the general journal. 

Entry is not made in the purchase journal until the mer- 
chandise purchased has been received and checked with the 
invoice as to proper count, weight, etc. 

Only the name of the firm from which the purchase is made 
is recorded in the purchase journal. That it is a purchase 



RECORDING PLANT TRANSACTIONS 



53 



is understood, since it is recorded in this particular book. 
A model purchase journal may be seen below. 



FORM 13 



Purchase Journal PI 

(Debit) (Credit) 


19 


















Jan. 


10 


Engineer's Supply Co. 


30 days net 








$5,000 


00 




31 


Purchases (Dr.) 






$5,000 


00 






Feb. 


8 


India Ink Co. 


2/10 n/30 








$ 150 


00 




19 


Best Paper Corp. 


n/30 








477 


00 




28 


Standard Tool Co. 


1/10 n/30 








1,943 


50 




28 


Purchases (Dr.) 






$2,570 


50 







The terms offered with the various purchases are listed in 
the explanation column. They are ascertained from the 
creditor's invoice. "Net 30 days" means that no cash 
discount will be allowed for prompt payment. In such a 
case the bill is supposed to be paid in full in 30 days from date 
of the invoice. "1/10 n/30, 1 ' or "2/10 n/30" denotes 
that a cash discount of 1 or 2 per cent will be allowed if the 
invoice is paid within 10 days from its date. 

Each invoice recorded in the purchase journal, in the name 
of the creditor, represents an obligation incurred. This 
means an increase in a liability in each case, and consequently 
a credit to an account payable account. The total of the 
individual credits to the account payable accounts is a 
debit to the Purchase account which is an increase in 
expense. 

A copy of an invoice is shown on page 54. 

The purchase transactions are entered in the purchase 
journal after each creditor's invoice has been checked with 
the receipt of the goods, and is given stamped approval by 
some designated employee of the buyer, usually a clerk under 
the auditor. 

In like manner a business concern bills each of its customers 
for all goods sold on account. Copies of customers' invoices 
represent the individual sales transactions, and thereby are 
the authority for making the entries in the sales journal. 



54 



COST FINDING FOR ENGINEERS 



9. The Sales Journal. 

Within the cover* of this journal are recorded the sales of 
merchandise on account to the customers. Cash sales may 



SHIPPED TO 



SOLO TO 



ORIGINAL INVOICE 

BEST PAPER CORPORATION 

FACTORY AND OFFICE 
ROCHESTER, PENNSYLVANIA 

DATE February 16, 19__ 

INVOICE NO. B 987 

CAR NO. Express 

SHIPPED FROM Rochester Warehouse 

VIA 
Above 



H J. Flnley 

3640 Fifth Ave. 
Pittsburgh, Pa. 



TERMS: K/30 



B/L NO. 

F. 0. B. SHIPPING POINT 

gJSn 42376 



QUANTITY 


' DESCRIPTION 


PRICE 


AMOUNT 


180 yds 
200 " 

300 " 
400 " 
544 " 


. Best 36" Tracing Paper 
Beat 64" White Linen Paper 
Veribast 60" Cream Linen Paper 
Best 72" Tracing Paper 
Best 72" White Linen Paper 


.10^ 
25 
.40 
.30 
.50 


4 15.00 
50.00 
120.00 
120.00 
172.00 


4477.00 




SPECIAL INSTRUCTIONS; 







NOTE:- WHERE BREAKAGE IS CONCEALED. B SJ3E 10 MAKE CONCEALED BREAKAGE CLAIM ACA.NST TRANSPORTATI 
COMPANY. 

or may not be shown therein. If they are included, the 
principle of cross-checking the cash arises. This point ie 
explained in Sec. 11 of this chapter. 

Entries are made in the sales journal from duplicate copies 
of the invoices sent to the customer covering the bill of sale, 
The name of the customer to whom credit has been extended 



RECORDING PLANT TRANSACTIONS 



55 



is placed in the account column. Seldom is there necessity for 
entering any information in the "explanation" column, 
unless'tt is the number of the customer's invoice. With such 
reference it is quite easy to refer to the filed copy of the invoice 
for any information, 

A form of a sales journal is shown below: 

FORM 14 



SI 
Sales Journal ,_. .... ,~ * 
(Debit) (Credit) 


19 


















Jan. 


28 


C. C. Winks 


n/30 




$600 


00 








31 


Sales (Cr.) 










$600 


00 


Feb. 


3 


Johnson & Dale 


1/10 n/30 




$166 


60 








6 


L. C. Sullivan 


ditto 




21 


17 








8 


C. R. Moxey 


u 




2 


29 








14 


Morey & Fox 


(( 




76 


38 








20 


J. H. Hayward 


tf 




155 


71 








25 


Newlin & Ross 


It 




421 


10 








28 


Sales (Cr.) 










$843 


25 



The individual amounts entered in the sales journal rep- 
resent the amount the various customers have promised to 
pay. These promises constitute an increase in assets. The 
total of the individual debits to the respective customers' 
accounts is the income from charge sales. This increase in 
income is shown as a credit in the Sales account. 

10. The General Journal. 

Transactions which are not recorded in the cash receipts 
or disbursements journals, the sales and purchase journals 
are listed below: 

1. The return of or allowances on purchases. 

2. The return of or allowances on sales. 

3. Purchase discount allowed by creditors. 

4. Sales discount allowed to customers. 

5. Receipt of a note from a customer. 

6. Issuance of a note to a creditor. 

7. Withdrawal of merchandise by owner. 

8. The purchase of fixed assets on account. 

9. The purchase of expense items on account. 



56 



COST FINDING FOR ENGINEERS 



10. Opening entries when assets other than cash are 
contributed by the owner. 

11. Correcting entries covering errors made in recording 
transactions in the wrong account. 

12. Adjusting entries. 

13. Closing entries. 

An illustration of some transactions recorded in the general 
journal is shown below: 

FORM 15 



General Journal Jl 

( Debit) (Credit) 


19 
















Jan. 


28 


Engineer's Supply Co. 




$ 500 


00 










Purchases Returns and Allowance 








$ 500 


00 






To record credit memo for 
















goods returned. 














30 


Sales Returns and Allowances 




25 


00 










C. C. Winks 








25 


00 






To record credit allowed on 
















paper damaged in shipment. 












Feb. 


1 


Engineer's Supply Co. 




1,500 


00 










Notes Payable 








1,500 


00 






To record issue of 6% 30-day 
















note dated Jan. 30. 














10 


H. J. Finley, Personal 




10 


00 










Purchases 








10 


00 






To record cost of goods with- 
















drawn for personal use. 














18 


India Ink Co. 




3 


00 










Purchase Discount 








3 


00 






To record discount received in 
















payment of invoice Feb. 8. 





























Pertinent facts to remember when recording transactions 
in the general journal are: 

1. Always enter the debit first, followed by the credit. 

2. Write the name of all accounts to be debited, in various 
entries, in an even vertical line from the top to the bottom 
of the page. 

3. The name of all accounts credited should be indented at 
least 1 inch to the right of the debit accounts. 



RECORDING PLANT TRANSACTIONS 



57 



4. Show adequate explanation for each entry made. This 
is of importance because of the wide variance in the nature of 
transactions entered in the general journal. 

5. Leave a space between the explanation of each entry 
and the debit of the following entry. 

11. Recording Same Transaction in Two Journals. 

The necessity for recording the same transaction in two 
journals occasionally occurs. A case will illustrate the 
method. It is convenient to have the total sales figure in the 
sales journal in some cases. In this event both the charge 
and cash sales may be placed in the sales journal. At the 
same time the cash sales must also appear in the cash receipts 
journal. The principle of cross-checking is used to eliminate 
the duplication of amounts that would be carried to the 
ledger account, Sales. 

FORM 16 



Cash Receipts Journal CR1 

(Debit) (Credit) 


19 


















Feb. 


8 


Sales 


Cash sales for week 


V 






$175 


00 




15 


Sales 


U (I i < it 


V 






450 


00 




22 


Sales 


n (( a (t 


V 






500 


00 




27 


C. C. Winks 


On account 








575 


00 




28 


Sales 


Cash sales for week 


V 






844 


00 






Cash (Dr.) 






$2,544 


00 







The cash sales are placed in the cash receipts journal 
in order to show the total amount of cash received. The 
same cash sales are placed in the sales journal to have the 
total daily, weekly, or mpnthly sales in the sales journal. 
Such procedure saves much time in posting. Where these 
items are checked " V " in the ledger folio column, no current 
postings are made. A dual entry of the same transaction 
involves this principle of cross-checking in order that the 
ledger be kept in balance. 



58 



COST FINDING FOR ENGINEERS 
FORM 17 



Oi 

Sales Journal /rfc ...* ,~ * 
(Debit) (Credit) 


19 


















Feb. 


3 


Johnson & Dale 


1/10 n/30 




$166 


60 








6 


L. C. Sullivan 


11 




21 


17 








8 


C. R. Moxey 


K 




2 


29 








8 


Cash 


Sales for week 


















ended the 8th 


V 


175 


00 








14 


Morey & Fox 


1/10 n/30 




76 


38 








15 


Cash 


Week ended 15th 


V 


450 


00 








20 


J. H. Hayward 


1/10 n/30 




155 


71 








22 


Cash 


Week ended 22nd 


V 


500 


00 








25 


Newlin & Ross 


1/10 n/30 




421 


10 








28 


Cash 


Week ended 28th 


V 


844 


00 










Sales (Cr.) 










$2,812 


25 



12. Advantages of Subdivision of the Journal. 

Several advantages result from the use of several books 
of original entry: 

1. A conservation of time and space results in recording 
transactions. The necessity for writing the words "cash/' 
" sales/' and "purchases" is eliminated for such transactions 
when they are recorded in the respective journals. 

2. Fewer postings are required. With fewer accounts to 
transfer to the ledger, the possibility of error in posting is 
reduced. 

3. It eliminates the necessity for writing detailed explana- 
tions in all books but the general journal. 

4. The segregation of transactions of like nature in special 
journals makes it easier to locate past records. 

5. It permits a subdivision of clerical labor in recording 
transactions. 

6. Responsibility for work done in connection with these 
books is localized when clerks are assigned to specialized work 
in connection with the cash, sales, or purchase journals. 

Questions 

1. Why would the ledger in itself be inadequate if all of the business 
transactions were shown only in it? 

2. In what books are the transactions first shown in actual practice? 

3. What books of original entry are found in most common use? 



RECORDING PLANT TRANSACTIONS 59 

4. How does the ruling of the journal differ from the ledger ruling? 

5. What is meant by " journalizing ?" 

6. State the four fundamental rules underlying the principle of debit 
and credit. 

7. What is the procedure which must take place before any trans- 
action may be properly recorded in the journal? 

8. When analyzing a transaction, how can you determine whether it 
affects an asset, a liability, an ownership, an income, or an expense 
account? 

9. What is the result of making an incorrect analysis of any business 
transaction? 

10. Contrast an expenditure and an expense. 

11. Differentiate between a capital and an operating expenditure. 

12. What is the result of confusing an operating expenditure with a 
capital expenditure? 

13. Name as many sources as possible from which cash receipts arise. 

14. In what manner are the receipts of cash recorded in the cash 
receipts journal? 

15. What is the debit and credit analysis applied to transactions 
entered in the cash receipts journal? 

16. For what general purposes are cash payments usually made? 

17. What information is shown when a transaction is entered in the 
cash disbursements journal? 

18. What is the debit and credit analysis applied to transactions 
entered in the cash disbursements journal? 

19. If a check were given to a railroad company in payment of a freight 
bill, what information would be placed in the account column? 

20. What is the nature of the transactions which are entered in the 
purchase journal? 

21. The names entered in the account column of the purchase journal 
represent what type of accounts? 

22. What is the debit and credit analysis applied to the purchase 
journal? 

23. What is the nature of the transactions entered in the sales journal? 

24. The names entered in the account column of the sales journal 
represent what type of accounts? 

25. What is the debit and credit analysis applied to the sales journal? 

26. Give some illustrations of transactions which are placed in the 
general journal, where there are also in use a cash receipts, cash dis- 
bursements, purchases, and sales journals. 

27. How does the entry of a transaction in the general journal differ 
from an entry in some one of the other special journals? 

28. Why is it that some transactions require entry in two journals? 

29. Dual entry of the same transaction in two different journals 
involves what principle? 

30. What advantages arise from the use of special journals? 



CHAPTER V 
LEDGER OPERATIONS 

1. The Purpose of the Ledger. 

The purpose and use of the ledger has been explained in 
detail in the foregoing chapters. To summarize, there must 
be a detailed record of all transactions recorded in the various 
capital and operating accounts to effect adequate control 
over the business. The function of the ledger is to record 
and classify the transactions in separate accounts with the 
various types of assets, liabilities, ownership, incomes, and 
expenses. 

2. Posting to the Ledger. 

While a ledger is required in any accounting system, it is 
quite inadequate in itself. In actual practice, the business 
and plant transactions are recorded, first in the journals, 
and then transferred to the ledger. The process of transfer- 
ring debits and credits from the journals to the ledger accounts 
is known as " posting. 7 ' Postings may be classified as " cur- 
rent " and "summary." 

Current postings are those made from day to day. Daily 
entries in the various journals should be posted as soon as 
possible after the entry is made, for two reasons. First, it 
avoids an accumulation of posting work at the close of the 
month. Second, it maintains an up-to-date balance in the 
customers' and creditors' accounts as well as in the plant- 
operating accounts. The engineer is not interested in the 
personal accounts, but he does have an interest in keeping 
the books posted up to date. Laxity in posting means delay 
in preparation of statements. Delays are not tolerated in 
the efficiently operated plant. 

Summary postings are those made at the close of each 
month. The column totals from the cash, purchases and 
sales journals are summaries posted respectively to the Cash, 
Purchases and Sales accounts in the ledger. 

60 



LEDGER OPERATIONS 61 

The journal entries described in the preceding chapter 
and posting as described in this chapter are typical of the 
small and medium-sized establishments. The idea must not be 
formed that this is the one and only way in which transactions 
are handled. Only in the smaller business concerns are the 
transactions journalized and posted longhand by pen and 
ink. Modern business practice carries on its journalizing 
and posting with bookkeeping machines. The operator 
frequently knows nothing of accounting theory, although 
the more efficient operator is one who is at least familiar 
with double-entry bookkeeping principles. In many of 
the larger business concerns, electric tabulating and sorting 
machines, with the use of the punch card, collect the data 
for the summary ledger postings and many other detailed 
analyses. A wide chasm exists between the old-fashioned 
hand-written set of books and the modern system of electric 
tabulation. The fundamental principles, however, remain 
unchanged. The fundamental accounting principles under- 
lie the more elaborate systems as well as the simpler ones. 
To be thoroughly familiar with the interpretation of 
accounting statements, and the meaning and significance of all 
items therein, one should be acquainted with the detailed 
principles of journalizing and posting. 

3. Principles of Posting. 

Certain mechanical principles must be adhered to during 
the posting process. When an amount is posted from any 
journal to the ledger, the page number of the journal must 
be entered in the "journal folio' 7 column of the ledger. In 
turn, the number of the page on which the ledger account 
appears is entered in the "ledger folio 77 column of the journal. 
A complete cross-reference is thereby created. This reference 
is invaluable if it becomes necessary to check for an error 
in posting. 

4. Posting the Cash Receipts Journal. 

The total of all items entered in the cash receipts journal 
represents the receipt of cash from many sources. The total 
constitutes an increase in the asset, cash ; hence, it is posted as 
a debit to the Cash account. This summary is usually posted 
at the close of the month. When the daily cash receipts are 



62 



COST FINDING FOR ENGINEERS 



numerous, a subtotal in pencil figures is made daily in order to 
balance the cash deposit or amount on hand. 

The individual items or entries in the cash receipts journal 
are posted daily as credits to the respective accounts named 
in the journal when the entry was made. 

The cash receipts journal shown in Chap. IV is used to 
illustrate the posting procedure as follows: 

FORM 18 



fT?1 

Cash Receipts Journal v^xvi 

(Debit) (Credit) 


19 


















Jan. 


ft 


H. J. Finley, Capital 


Original investment 


16 






$10,000 


00 




31 


Cash (Dr.) 




1 


$10,000 


00 






Feb. 


8 


Sales 


Cash sales for the 


















week ended today 


V 






175 


00 




15 


Sales 


44 4 44 


V 






450 


00 




22 


Sales 


14 II II 


V 






500 


00 




27 


C. C. Winks 


On account 


2 






575 


00 




28 


Sales 


Cash sales for the 


















week ended today 


V 






844 


00 




28 


Cash (Dr.) 




1 


$ 2,544 


00 








~~ 













The above general items are then posted as follows to 
their respective ledger accounts: 

General Ledger 



H. J. Finley, Capital 


15 










19 
Jan. 


6 


Cash 


CR1 


$10,000 


00 






Cash 






1 


19 
Jan. 
Feb. 


31 

28 


Jan. Receipts 
Feb. Receipts 


CR1 
CR1 


$10,000 
2,544 


00 
00 
























C. C. Winks 






2 








** 






19 
Feb. 


27 


Cash 


CR1 


$575 


00 



LEDGER OPERATIONS 



63 



In reality the entries in the cash receipts journal represent 
compound entries, which may be illustrated as follows: 

Postings made 

For rCash $10,000 

January I H. J. Finley, Capital $10,000 

Cash 2,544 

Sales 1,969 



As a summary 
Currently 

As a summary 
From Sales 
Journal 
Currently 



For 
February 

C. C. Winks 575 

The cash sales ($1,969) for February are also entered in the 
sales journal and included in the total posted from that 
journal (see page 68). 

6. Posting the Cash Disbursements Journal. 

The total of the individual items recorded in the cash dis- 
bursements journal represents payment of, and consequently 
a decrease in, the asset, cash. Accordingly, the total cash 
disbursed is posted as a credit to the cash account. This 
summary posting is made at the end of each month. 

The individual items recorded in this journal represent 
increases in expenses and assets, or decreases in liabilities, 
ownership, and incomes; hence they are posted as debits to the 
respective ledger accounts named in the account column of 
the journal. 

The cash disbursements journal illustrated in Chap. IV 
is used to show the posting procedure as follows: 

FORM 19 



Cash Disbursements Journal GDI 
(Debit) (Credit) 


19 


















Jan. 


25 


Engineer's Supply Co. 


On account 


10 


$3,000 


00 








27 


H. J. Finley, Personal 


Personal use 


16 


500 


00 








31 


Store Salaries 


Clerks 


21 


200 


00 








31 


Cash (Cr.) 




1 






$3,700 


00 


Feb. 


1 


Rent 


Penn Realty Co. 


22 


$ 250 


00 








3 


Store Expense 


Telephone 


23 


4 


00 








6 


Furniture and Fixtures 


Cash register 


9 


225 


00 








13 


Store Expense 


Electric power 


23 


18 


00 








17 


Purchases 


Drawing pens 


V/ 


27 


00 








18 


India Ink Co. 


Account in full 


11 


147 


00 








23 


Office Expense 


Stationery 


24 


14 


00 








28 


Store Salaries 


Clerks 


21 


200 


00 








28 


Office Salaries 


Bookkeeper 


25 


80 


00 








28 


Notes Payable 


Engineer's Supply Co. 


14 


1,500 


00 








28 


Interest Expense 


Note 


26 


7 


50 








28 


Cash (Cr.) 




1 






$2,472 


50 

















64 



COST FINDING FOR ENGINEERS 



The items in the above journal are then posted to the ledger 
accounts as follows: 

General Ledger 



Cash 1 


19 












1 

19 
Jan. 
Feb. 


31 

28 


Jan. Payments 
Feb. 


CD1 
CD1 


$3,700 
2,472 


00 
50 


Engineer's Supply Co. 


10 


19 
Jan. 


25 


Cash 


CD1 


$3,000 


00 














II. J. Finley, Personal 


16 


19 
Jan. 


31 


Cash 


CD1 


500 


00 














Store Salaries 


21 


19 
Jan. 
Feb. 


31 

28 


Cash 


CD1 
CD1 


200 
200 


00 
00 


















Rent 22 


19 
Feb. 


1 


Cash 


GDI 


$250 


00 














Store Expense 23 


19 
Feb. 
Feb. 


3 
13 


Cash 


CD1 
CD1 


$ 4 
18 


00 
00 














Furniture and Fixtures 9 


19 
Feb. 


6 


Cash 


CD1 


$225 


00 






















India 


Ink Co. 11 


19 
Feb. 


18 


Cash 


CD1 


$147 


00 















LEDGER OPERATIONS 65 


Office Expense 24 


19 
Feb. 


23 


Cash 


GDI 


$14 


00 















Office Salaries 



25 



19 
Feb. 


28 


Cash 


CD1 


$80 


00 















Notes Payable 



14 



19 
Feb. 


28 


Cash 


GDI 


$1,500 


00 















Interest Expense 



26 



19 
Feb. 


28 


Cash 


CD1 


$7 


50 















The transactions recorded in the cash disbursements 
journal are shown below in compound entry form. The 
manner in which the postings are handled may be seen with 
greater ease. 

Postings made 

Currently 
Currently 
Currently 

As a summary 
Currently 
Currently 
Currently 
Currently 

From Purchase Journal 
Currently 
Currently 
Currently 
Currently 
Currently 
Currently 

As a summary 

The cash purchase of $27, made on Feb. 17, is entered also 
in the purchase journal. The total purchases for the month 
will be posted as one figure from the purchase journal. 

6. Posting the Purchase Journal. 

The sum of all the purchases of merchandise made during 
the month constitutes an increase in expense. This total is 





Engineer's Supply Com- 
pany 


$3,000.00 




For 
January 


H. J. Finley, Personal. . . 
Store Salaries 


500.00 
200.00 






Cash 




$3,700.00 




| Rent 


250.00 






Store Expense 


4.00 






Furniture and Fixtures. . 
Store Expense 


225.00 
18.00 






Purchases .... 


27.00 




For 


India Ink Company 


147.00 




February 


Office Expense 


14.00 






Store Salaries 


200 . 00 






Office Salaries . 


80.00 






Notes Payable 


1,500.00 






Interest Expense 


7.50 






Cash 




$2,472.50 



66 



COST FINDING FOR ENGINEERS 



posted as a summary, at the end of each month, to the debit 
side of the Purchases account. 

Each amount entered in the purchase journal represents 
an indebtedness of the concern to some vendor, usually a 
supply company, unless cash purchases also are shown. 
The name of the vendor in the purchase journal signifies the 
increase of a liability. The amount recorded is therefore 
posted as a credit to the personal vendor account named, 

Posting the purchase journal is illustrated as follows: 

FORM 20 



Purchase Journal pj 
(Debit) (Credit) 


19 
Jan. 


10 
31 


Engineer's Supply Co. 
Purchases (Dr.) 

India Ink Co. 
Cash Purchases 
Best Paper Corp. 
Standard Tool Co 
Purchases (Dr.) 


30 days net 

2/10 n/30 

n/30 
1/10 n/30 


10 
19 


$5,000 


00 


$5,000 


00 






Feb. 


8 
17 
19 
28 
28 


11 
v/ 
12 
13 
19 


$2,597 


50 


$ 150 
27 
477 
1,943 


00 
00 
00 
50 


- ' 












~ 


~ 



The items entered in the above journal are then posted to 
the ledger accounts: 



General Ledger 



Purchases 19 


19 
























Jan. 


31 


Jan. Purch. 


PI 


$5,000 


00 














Feb. 


28 


Feb. " 


PI 


2,597 


50 















Engineer's Supply Company 10 














19 
Jan. 


10 


Purchase 


PI 


$5,000 


00 



LEDGER OPERATIONS 67 


India Ink Company 11 














19 
Feb. 


8 


Purchases 


PI 


150 


00 



Best Paper Corp. 



12 















19 
Feb. 


19 


Purchases 


PI 


477 


00 



Standard Tool Company 



13 















19 
Feb. 


28 


Purchases 


PI 


1,943 


50 



Posting the purchase journal is better visualized in compound 
entry form as follows: 



For f Purchases $5,000.00 

January \ Engineer's Supply Co $5,000.00 

'Purchases 2,597.50 

India Ink Co 150.00 

Cash 27.00 

Best Paper Corporation 477. 00 

Standard Tool Co 1,943.50 



For 
February 



Postings made 

As a summary 

Currently 
As a summary 

Currently 

From cash disbursements 

Currently 

Currently 



7. Posting the Sales Journal. 

The total of all amounts recorded daily in the sales journal 
constitutes an increase in income. This summary is posted, 
therefore, as a credit to the Sales account. This posting 
takes place at the close of the month. 

The separate items entered in the sales journal comprise 
sales made to the customers on account. An exception to 
this principle exists when "cash sales' 7 are entered in the 
sales journal as well as in the cash receipts journal. The 
name of the customer denotes the increase of an asset, i.e., 
an increase in the amount owing to the business. Each 
amount for which the customer becomes indebted is posted 
as a debit to the respective customer's account named in the 
account column of the sales journal. 



5 COST FINDING FOR ENGINEERS 

Posting the sales journal is illustrated below: 

FORM 21 



Si 
Sales Journal (Debit) (Credit) 


19 


















Jan. 


28 


C. C. Winks 


n/30 


2 


$600 


00 










Sales (Cr.) 




17 






$ 600 


00 


Feb. 


3 


Johnson & Dale 


1/10 n/30 


3 


$166 


60 








6 


L. C. Sullivan 


It 


4 


21 


17 








8 


C. R. Moxey 


it 


5 


2 


29 








8 


Cash Sales 




V/ 


175 


00 








14 


Morey & Fox 


(f 


6 


76 


38 








15 


Cash Sales 




S/ 


450 


00 








20 


J. H. Hayward 




7 


155 


71 








22 


Cash Sales 




V 


500 


00 








25 


Newlin & Ross 


it 


8 


421 


10 








28 


Cash Sales 




V/ 


844 


00 










Sales (Cr.) 




17 






$2,812 


25 



The items entered in the above sales journal are then 
posted to the ledger accounts: 

General Ledger 

Sales 17 















19 
























Jan. 


31 


Jan. Sales 


SI 


$ 600 


00 














Feb. 


28 


Feb. Sales 


SI 


2,812 


25 



C. C. Winks 



19 
Jan. 


28 


Sales 


SI 


$600 


00 















Johnson & Dale 



19 
Feb. 


3 


Salea 


SI 


$166 


60 















LEDGER OPERATIONS 69 
L. C. Sullivan 4 


Feb. 


6 


Sales 


81 


$ 21 


17 















C. R. Moxey 



19 
Feb. 


8 


Sales 


81 


$o 
& 


29 















Morey & Fox 



19 
Feb. 


14 


Sales 


81 


$ 76 


38 















J. H. Hayward 



19 
Feb. 


20 


Sales 


81 


$155 


71 















Newlin & Ross 



19 
Feb. 


28 


Sales 


SI 


$421 


10 















Posting the sales journal may be illustrated in compound 
entry form as follows: 



For 
January 



For 
February 



C. C. Winks $600.00 

Sales $ 600.00 

Johnson & Dale 166. 60 

L. C. Sullivan 21.17 

Cash 175.00 

C. R. Moxey 2.29 

Morey & Fox 76.38 

Cash 450.00 

J. H. Hayward 155.71 

Cash 500.00 

Newlin and Ross 421.10 

Cash 844.00 

Sales $2,812.25 



Postings made 

Currently 

As a summary 
Currently 
Currently 

From Cash Receipts 
Currently 
Currently 

From Cash Receipts 
Currently 

From Cash Receipts 
Currently 
From Cash Receipt* 

As a summary 



70 



COST FINDING FOR ENGINEERS 



8. Posting the General Journal. 

There are no summary postings to be made from the two- 
column general journal. Each entry is posted currently, 
both the debit and the credit. The amount entered as a 
debit in the general journal is posted as a debit to the account 
bearing the same name in the ledger as recorded in the 
journal. In a similar manner, the credits are posted from 
the general journal to the ledger accounts: 



FOKM 22 



General Journal /r . .... , ...* 

(Debit) (Credit) 


19 
















Jan. 


28 


Engineer's Supply Co. 


10 


$ 500 


00 










Purchase Returns and Allowances 


20 






$ 500 


00 






To record credit received for 
















goods returned. 














30 


Sales Returns and Allowances 


18 


25 


00 










C. C. Winks 


2 






25 


00 






To record credit allowed on 
















paper damaged in shipment. 












Feb. 


1 


Engineer's Supply Co. 


10 


1,500 


00 










Notes Payable 


14 






1,500 


00 






To record issue of 6% 30-day 
















note dated Jan. 30. 














10 


H. J. Finley, Personal 


16 


10 


00 










Purchases 


19 






10 


00 






To record cost of goods with- 
















drawn for personal use. 














18 


India Ink Co. 


11 


3 


00 










Purchase Discount 


27 






3 


00 






To record discount earned in 
















payment of invoice of Feb. 8. 













Posting from the general journal is illustrated below: 



General Ledger 
Engineer's Supply Co. 



10 



19 
























Jan. 


28 


Returns 


Jl 


$ 500 


00 














Feb. 


1 


Note 


Jl 


1,500 


00 















LEDGER OPERATIONS 71 


Purchase Returns and Allowances 20 














19 
Jan. 


28 


Eng. Sup. 
Co. 


Jl 


$ 500 


00 



Sales Returns and Allowances 



18 



19 
Jan. 


30 


C. C. Winks 


Jl 


$ 25 


00 


19 













C. C. Winks 















19 
Jan. 


30 


Sales Allow. 


Jl 


$ 25 


00 



Notes Payable 



14 















19 
























Feb. 


1 


Eng. Sup. 
























Co. 


Jl 


$1,500 


00 



II. J. Finley, Personal 



16 



19 
Feb. 


10 


Purchases 


Jl 


$ 10 


00 















Purchases 



19 















19 
























Feb. 


10 


H. J. Fin- 
























ley, Per- 
























sonal 


Jl 


$ 10 


00 



India Ink Co. 



11 



19 


18 


Pur. Disc. 


Jl 


$0 



00 















72 



COST FINDING FOR ENGINEERS 
Purchase Discount 



27 















19 
























Feb. 


18 


India Ink 
























Co. 


Jl 


$ 3 


00 



9. The Accounts after Posting. 

At the close of any accounting period, after posting is 
complete, the majority of the accounts in the ledger will 
have a debit or credit balance. Some accounts with customers 
and creditors will be balanced and ruled off. Cash will have 
been received and disbursed to offset charges to customers 7 
accounts and credits to creditors' accounts. Other charges 
and credits for discounts, returns and allowances may also 
be posted in order to balance these accounts. Illustrations 
of closed personal accounts are shown as follows: 

C. C. Winks 2 



19 












19 












Jan. 


28 


Sales 


SI 


$600 


00 


Jan. 


30 


Sales Allow- 
























ances 


Jl 


$ 25 


00 














Feb. 


27 


Cash 


CR1 


575 


00 










$600 


00 










$600 


00 























India Ink Company 



11 



19 












19 












Feb. 


18 


Cash 


GDI 


$147 


00 


Feb. 


8 


Purchases 


PI 


$150 


00 




18 


Purchase 
























Discount 


Jl 


3 


00 






















$150 


00 










$150 


00 























The open accounts with debit balances, at the end of any 
accounting period after postings are complete, will fall in one 
of the following four groups : 

1. Assets, representing: 

a. Property owned by the business. 

b. Amounts customers owe to the business. 

2. Expenses, covering: 

a. Purchases. 



LEDGER OPERATIONS 73 

6. Manufacturing. 

c. Marketing. 

d. Administration. 

e. Incidental costs. 

3. Supplementary Ownership (Personal account), representing: 

a. Cash withdrawn by owner for personal use. 

&. Merchandise withdrawn by owner for personal use. 

4. Income Deductions, representing: 

a. Sales returns and allowances. 

6. Sales discounts allowed customers. 

Accounts with credit balances at the close of any accounting 
period, after postings are> completed, will fall under one of 
the following groups: 

1. Liabilities, representing: 

a. Debts owed by the business. 

2. Ownership (Capital), representing: 

a. Investments by owner, or 

6. Investments plus accumulated profits not withdrawn, or 

c. Investment minus accumulated losses. 

3. Income, representing: 

a. Sales of product. 
6. Incidental earnings. 

4. Expense Deductions, representing: 

a. Purchase returns and allowances. 
6. Purchase discounts. 

Thus, after all postings are complete, at the close of any 
accounting period, the open accounts in the ledger reflect a 
summary of the period's transactions. 

10. The Trial Balance. 

The trial balance is a list of all of the open accounts in the 
ledger showing their debit or credit balances. Balances 
only are used in setting up a trial balance. A trial balance 
may be taken at any time the postings are completed from all 
the journals. Always the process is performed at the close of 
each month. The purpose of the trial balance is twofold. 

In the first place, the trial balance tests the mathematical 
accuracy of the ledger to show whether or not it is "in 
balance. " Some error may have been made in posting, even 
though all transactions have been properly recorded in the 
various journals. A debit may have been posted as a credit 
or vice versa. Either a debit or a credit may have been omitted 
in posting. In event an error is made in posting, the ledger 



74 



COST FINDING FOR ENGINEERS 



will not be "in balance." The preparation of the trial 
balance will show whether or not there is conformity with the 
debit and credit principle previously mentioned, namely, the 
sum of the debit balances must equal the total of the credit 
balances. Preparing a trial balance to prove the equilibrium 
of the ledger is not its chief purpose, although it is prerequisite 
to the second function. 

In the second place, the trial balance summarizes, in concise 
form, a list of all open account balances with assets, liabilities, 
ownership, incomes and expenses. This list provides the 
necessary information from which is prepared the statement 
of income, profit and loss, statement of ownership, and the 
balance sheet. Thus, the real purpose of the trial balance 
is to summarize the ledger accounts in order that the account- 
ing statements may be prepared. But this procedure is predi- 
cated upon the existence of a " balanced ledger." 

Certain mechanical steps must be followed prior to taking 
off a trial balance. These steps are necessary in connection 
with every account having more than one debit or credit 
posting. The steps are: 

1. Add the debits, placing the total in small pencil figures 
under the last posting in the money column. 

2. Add the credits in a similar manner. 

3. If the debit total is greater than the credit total, a debit 
balance exists, which is placed in small pencil figures in the 
explanation column on the debit side of the account. 

4. Similar procedure is taken in ascertaining the credit 
balance of an account. 

5. The debit balances and the credit balances are then 
listed in two separate columns, which forms the trial balance. 

The ledger accounts recording the transactions entered in 
and posted from the illustrative journals in this chapter will 
be used to illustrate the preparation of a trial balance. 

General Ledger 

Cash 1 



19 












19 












Jan. 


31 




CR1 


$10,000 


00 


Jan. 


31 




GDI 


$3,700 


00 


Feb. 


28 




cm 


2,544 


00 


Feb. 


28 




CD1 


2,472 


50 






6,371.60 




12,544 


00 










8,172 


60 



LEDGER OPERATIONS 75 


C. C. Winks 2 


Jan. 


28 




SI 


$600 


00 


Jan. 
Feb. 


30 

27 




Jl 

CR1 


$25 
575 


00 
00 


$600 


00 


$600 


00 








Johnso 


n& 


t Dal( 


3 






3 


19_ 
Feb. 


3 




SI 


$166 


60 














L. C. Sullivan 4 


Feb. 


6 




SI 


$21 


17 














C. R. Moxey 5 


Feb. 


8 




SI 


$2 


29 














Morey & Fox 6 


Feb. 


14 




SI 


$76 


38 














J. H. Hayward 7 


Feb. 


20 




81 


$155 


71 















Newlin & Ross 



Feb. 


28 




SI 


$421 


10 















76 



COST FINDING FOR ENGINEERS 
Furniture and Fixtures 



19 
Feb. 


6 


' 


GDI 


$225 


00 














Engineer's Supply Co. 10 


Jan. 
Feb. 


25 

28 

1 




GDI 
Jl 
Jl 


$3,000 
500 
1,500 


00 
00 
00 
00 


Jan. 


10 




PI 


$5,000 


00 


$5,000 


$5,000 


00 























India Ink Co. 



11 



Feb. 


18 
18 




GDI 
Jl 


$147 
3 


00 
00 


Feb. 


8 




PI 


$150 


00 
00 


$150 


00 


$150 























Best Paper Corp. 



Standard Tool Company 



Notes Payable 



12 















19 
Feb. 


19 




PI 


$477 


00 



13 















19 
Feb. 


28 




PI 


$1,943 


50 



14 



19 
Feb. 


28 




GDI 


$1,500 


00 


19 
Feb. 


1 




Jl 


$1,500 


00 























LEDGER OPERATIONS 77 


H. J. Finley, Capital 15 














19 
Jan. 


8 




CR1 


$10,000 


00 



H. J. Finley, Personal 



Sales 



Sales Returns and Allowances 



16 



19 
























Jan. 


27 




GDI 


$500 


00 














Feb. 


10 




Jl 


10 


00 






















610 


00 















17 















19 
























Jan. 


31 




SI 


$ 600 


00 














Feb. 


28 




SI 


2,812 


25 






















3,412 


25 



18 



19 
Jan. 


30 




Jl 


$25 


00 















Purchases 



19 



19 












19 












Jan. 


31 




PI 


$5,000 


00 


Feb. 


10 




Jl 


$10 


00 


Feb. 


28 




PI 


2,597 


50 


















$7,587.50 




7,597 


50 















Purchases Returns and Allowances 



20 















19 
Jan. 


28 




Jl 


$500 


00 



78 



COST FINDING FOR ENGINEERS 
Store Salaries 



21 



19 
Jan. 
Feb. 


31 

28 




CD1 
GDI 


$200 
200 


00 
00 






















400 


00 














Rent 


22 


19 
Feb. 


1 




GDI 


$250 


00 














Store Expense 23 


19 
Feb. 


3 
13 




GDI 
GDI 


$ 4 

18 


00 
00 






















22 


00 














Office Expense 24 


19 
Feb. 


23 




GDI 


$14 


00 














Office Salaries 25 


19 
Feb. 


28 




GDI 


$80 


00 














Interest Expense 26 


19 
Feb. 


28 




GDI 


$7 


50 














Purchase Discount 27 














19 
Feb. 


18 




Jl 


3 


00 



LEDGER OPERATIONS 



79 



The following is a trial balance prepared from the foregoing 
accounts shown in the ledger of H. J. Finley, at Feb. 28, 19 : 

FORM 23 
H. J. FINLEY 
TRIAL BALANCE 
February 28, 19 (Debit) (Credit) 







Cash 




$ 6,371 
166 
21 
2 
76 
155 
421 
225 

510 

25 

7,587 

400 
250 
22 
14 
80 
7 


50 
60 
17 
29 
38 
71 
10 
00 

00 

00 
50 

00 
00 
00 
00 
00 
50 


$ 477 
1,943 
10,000 

3,412 
500 

3 


00 
50 
00 

25 
00 

00 


Johnson & Dale 


L. C. Sullivan 


C. R. Moxey 


Morey & Fox 


J. H. Hay ward 


Newlin & Ross 


Furniture and Fixtures . 


Best Paper Corporation 


Standard Tool Company 


H. J. Finley, Capital 


H. J. Finley, Personal 


Sales 


Sales Returns and Allowances 


Purchases 


Purchases Returns and Allowances. 
Store Salaries 


Rent 


Store Expense 


Office Expense 


Office Salaries 


Interest Expense 


Purchase Discount 




$16,335 


75 


$16,335 


75 











11. Reasons Why a Trial Balance May Not Balance. 

One has the right to feel justly proud should a correct 
trial balance be the result of the first effort. And what is 
the reason for the elation? It means, with few exceptions, 
that the person in charge of the books has accurately recorded 
and posted all transactions, and that much grief has been 
avoided. In event that the trial balance will not balance, it 
may be the result of one or several reasons. And quite often 
much woe accompanies the location of the error or errors. 
Hence, the maxim is " Accuracy First " in recording trans- 
actions, posting and taking a trial balance. 



80 COST FINDING FOR ENGINEERS 

The following are reasons why a trial balance may not 
balance: 

1. Error in totaling debits or credits in the ledger accounts. 

2. Error in subtracting debits from credits, or vice versa, 
in obtaining the account balances. 

3. Error in the addition of the debit or credit column of 
the trial balance. 

4. Omitting a debit balance or a credit balance in prepara- 
tion of the trial balance. 

5. Failure to post a debit amount or a credit amount. 

6. Posting a debit amount as a credit amount or vice versa. 

7. Making a transposition of figures when posting. 

8. Making a transplacement of the decimal point when 
posting. 

12. Errors Which Will Not Prevent the Trial Balance from 
Balancing. 

There are two types of errors possible which will not 
prevent obtaining a trial balance of the ledger, yet the 
preparation of financial statements from such a trial balance 
would not reflect a true financial condition. These errors 
may be classified as follows: 

1. Errors of omission. 

2. Errors of commission 

Errors of omission may be subdivided as follows: 
a. Failure to post both the debit and the credit of the 

same entry. 

6. Failure to record a transaction. 

In either of the above cases, the omission may never be 
brought to light. It is possible that subsequent inspection 
of financial statements may bring the omissions to the surface. 
Errors of commission may be subdivided as follows : 
a. The wrong amount recorded and posted. 
6. Posting to the wrong account, 

c. Error of principle. 

d. Compensating errors. 

Committing any of the four above errors, thus, would not 
prevent obtaining a trial balance. But the balances in 
some of the accounts would be affected by the errors, thus 
resulting in erroneous figures being shown in the financial 
statements. 



LEDGER OPERATIONS 81 

13. Correcting Entries. 

When an error of omission has been ascertained, the trans- 
action is recorded as it should have been in the first instance. 

The location of an error of commission requires a correcting 
entry made in the general journal to adjust the accounts 
affected. The following entries illustrate some correcting 
entries : 

a. The Wrong Amount Recorded and Posted. 

A sale of $50 was made to J. P. Conley on account. It was 
entered in the sales journal as $150 and so posted. The entry to 
correct is as follows: 

Sales $100 

J. P. Conley $100 

b. Posting to the Wrong Account. 

A debit of $750 for salaries paid to salesmen was posted from the 
cash disbursements book as a debit to the Salesmen's Traveling 
Expenses account instead of the Salesmen's Salaries account. The 
entry to correct is as follows: 

Salesmen's Salaries $750 

Salesmen's Traveling Expenses $750 

c. Error of Principle. 

An error of principle refers to the confusion between capital and 
operating accounts. An expenditure of $67.98 for repairs to 
machinery was charged to the Machinery account. This expendi- 
ture represents a maintenance charge, and should be debited to an 
operating account, Repairs to Machinery. The entry to correct is 
as follows: 

Repairs to Machinery $ 67 . 98 

Machinery $ 67.98 

d. Compensating Errors. 

A compensating error results when two errors involving exactly 
the same amount occur in posting, one offsetting the other. An 
illustration of this would be the omission of a credit of $100, from one 
entry, and a debit of $100 from another entry. No correcting entry 
is necessary for this type of error, since the total debits and credits 
are affected in the same amount. An error of omission is also 
involved when a compensating error takes place. If the facts 
become known, the omitted debit and credit amount must be posted. 

Questions 

1. What is the function of the ledger? 

2. Explain what is meant by the term "posting." 

3. Differentiate between current and summary postings. 

4. What is the necessity for making current postings? 

5. What is meant by making a "cross-reference" in posting? It 
serves what purpose? 



82 COST FINDING FOR ENGINEERS 

6. What are the current and summary postings made from the: 
a. Cash receipts journal? 

6. Cash disbursements journal? 

c. Purchases journal? 

d. Sales journal? 

7. What is the nature of the postings made from the general journal? 

8. What certain type of accounts may show no balance at the end of 
an accounting period, although many debit and credit postings have 
been made to these accounts during the period? 

9. The accounts with debit balances at the close of any accounting 
period represent what general groups of accounts? 

10. Accounts with credit balances at the close of any accounting period 
represent what general groups of accounts? 

11. What facts determine whether the owner's Personal account has a 
debit or a credit balance? 

12. Define a trial balance. 

13. When is a trial balance prepared? 

14. Enumerate the steps in the procedure of taking off a trial balance. 

15. What are the purposes of the trial balance? Which is the more 
important and why? 

16. Enumerate the reasons why a trial balance may not balance. 

17. What type of errors may be made which will not prevent the trial 
balance from balancing? 

18. What is a correcting entry? 



CHAPTER VI 
PREPARATION OF THE WORK SHEET 

1. Description of the Work Sheet. 

A work sheet may be defined as a summary of all the 
recorded transactions for the accounting period, together with 
all other unrecorded data applicable to the same period. 
The recorded transactions are in the form of a trial balance. 
The unrecorded data are ascertained by: 

1. Taking a physical inventory if a perpetual inventory 
is not a part of the accounting system. 

2. Computing the amount of prepaid expenses and prepaid 
income applicable to the present period. 

3. Calculating the accrued expenses and accrued income 
items applicable to the present period. 

4. Estimating the amount of depreciation on capital 
assets applicable to the present period. 

5. Estimating the amount of customers' accounts which will 
prove to be uncollectible, arising from sales made in the 
accounting period just closing. 

6. Estimating certain operating expenditures and setting 
up reserves for them. 

Description of the last four classes of unrecorded data is 
carried on in the next three chapters. The method of handling 
the inventory at the close of the accounting period has already 
been mentioned in Chap. Ill, in connection with the prepara- 
tion of plant-operating statements, the statement of income, 
profit and loss, and the balance sheet. The necessity for its 
inclusion in the work sheet is described in this chapter. 

The recorded transactions in trial balance form and the 
unrecorded data are set up on columnar analysis paper which 
forms the work sheet. 

2. Form of the Work Sheet. 

The simplest form of the work sheet requires six money 
columns, with additional space for the names of the accounts. 

83 



84 



COST FINDING FOR ENGINEERS 



A more common form is the eight-column work sheet, pro- 
viding an " adjustments" column, as illustrated below: 

FORM 24. EIGHT-COLUMN WORK SHEET 



Account 


Trial 
Balance 


Adjustments 


Profit and 
Loss 


Balance 
Sheet 


Dr. 


Cr. 


Dr. 


Cr. 


Dr. 


Cr. 


Dr. 


Cr. 





















From the above form, the work sheet may be expanded to 
provide for departmental plant analysis. A fourteen-column 
work sheet is described in Chap. XXIV. 

3. Purpose of the Work Sheet. 

The work sheet is a supplementary aid to the regular 
accounting books and is used in the preparation of the oper- 
ating and financial statements. The work sheet provides a 
convenient method of summarization of all the results of the 
accounting period on a single sheet. The purpose of the 
work sheet is to ascertain the net profit or net loss figure and 
verify its accuracy preliminary to the preparation of the 
formal accounting statements and closing the operating 
accounts in the ledger. 

The use of the work sheet by the accountant and engineer is 
optional and not imperative. Net profit or net loss may be 
obtained by any of the following methods: 

1. Preparation of accounting statements from account 
balances taken directly from the accounts. 

2. Preparation of accounting statements from the trial 
balance without setting up a work sheet. 

3. Closing the operating accounts in the ledger through a 
Profit and Loss account (see Chap. XI). 

4. Comparing the Ownership account at the close of two 
consecutive accounting periods. 

After the preparation of the work sheet is once understood, 
however, it becomes a regular fixture used at the close of each 
accounting period. In a concern having a large number of 
accounts and many adjustments, the work sheet is of indis- 



PREPARATION OF THE WORK SHEET 85 

pensable value. Every type of adjustment, mentioned in 
Sec. 1 of this chapter, is reflected in both the statement of 
income, profit and loss, and the balance sheet. Overlooking 
some adjustment frequently occurs when a work sheet is not 
used. Therefore, several advantages are available with the 
use of a work sheet. 

4. Advantages of the Work Sheet. 

The following advantages are found to exist in making use 
of the work sheet: 

1. Proof of the mechanical accuracy and dispatch in arriving 
at the net profit or net loss. 

2. After the completion of the work sheet, it furnishes the 
detailed information for the preparation of the : 

a. Financial and operating statements. 
6. Adjusting journal entries. 
c. Closing journal entries. 

In summarizing the above information, the work sheet may 
be called the accountant's master sheet. 

6. Steps in the Preparation of the Work Sheet. 

There are five steps involved in the preparation of the work 
sheet. They are as follows: 

1. Enter the trial balance on the work sheet. 

2. Enter the adjustments in the adjustment column. 

3. Incorporate the adjusting data applicable to the accounts 
in the trial balance. 

4. Distribute all operating account figures to the columns 
labeled profit and loss. 

5. Distribute all capital account figures to columns labeled 
balance sheet. 

A work sheet prepared from the ledger of H. J. Finley, 
shown in Chap. V, follows on page 86. 

6. The Theory upon Which the Work Sheet Is Based. 

Although the work sheet is not an integral part of the 
accounting system, the principle of debit and credit underlies 
its preparation. This is first evident when the trial balance 
is copied in the first two money columns. Each division of 
the work sheet labeled " adjustments," "profit and loss/' 



86 



COST FINDING FOR ENGINEERS 



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PREPARATION OF THE WORK SHEET 87 

and " balance sheet'' is divided into two columns, namely, 
debit and credit. 

Every adjustment is composed of both a debit and a credit. 
When all adjustments are entered, the total of the debit 
column must be equal to the total of the credit column. 

Expense accounts appearing on the debit side of the trial 
balance column, whether or not affected by adjustments, are 
carried to the debit side of the profit and loss column. A 
decrease of income, such as sales returns and allowances, is 
handled in the same manner. 

Income accounts shown on the credit side of the trial 
balance column, affected or not by adjustments, are carried 
to the credit side of the profit and loss column. A decrease 
of expense is handled likewise. 

The asset accounts also appearing on the debit side of the 
trial balance column, changed or unchanged by adjustments, 
are transferred to the debit side of the balance sheet column. 
The owner's Personal account showing a debit balance is 
likewise transferred to the debit side of the balance sheet 
column, representing a decrease in ownership. 

The liability accounts and the owner's capital account are 
transferred from the credit side of the trial balance column, 
whether or not increased or decreased by any adjustments, to 
the credit side of the balance sheet column. 

Extreme care must be used in making the distribution of the 
amounts from the trial balance column and adjustments 
column. It is of greatest importance to be familiar with the 
classification Of accounts and to possess the ability to differen- 
tiate between operating and capital accounts. The penalty 
for being unable to differentiate between a capital and an 
operating account spells misstatement of the net profit or 
net loss figure. And proper managerial control cannot be 
exercised when financial statements are prepared with 
erroneous figures. 

7. The New Inventory in the Work Sheet. 

Following the accounts named in the trial balance column 
is written the word " Inventory" together with the date of 
closing. The amount is shown both as a debit and a credit in 
the adjustment column on the same line opposite the account 
caption. The debit amount is distributed from the adjustment 



88 COST FINDING FOR ENGINEERS 

column to the debit column of the balance sheet column. It 
is shown as an asset, because it represents the value of goods 
on hand at the close of the accounting period. It represents 
the cost of goods purchased which have not been sold. 

The amount of the new inventory, as a credit in the adjust- 
ment column, is transferred to the credit side of the profit 
and loss column. By so doing, it acts as a decrease of expense. 
It must be remembered that the cost of goods sold is an expense 
as well as are the various marketing, administrative, and finan- 
cial costs. The cost of goods available for sale is composed of 
three items, namely: 

(Old) Inventory (at beginning of period) $ 6,000 

Net Purchases 23,589 

Freight in on Purchases 350 

Cost of Goods Available for Sale $29^939 

* 

To arrive at the cost of goods sold, the cost of the unsold 
goods (the new inventory) must be subtracted from the total 
cost of goods available for sale. 

Cost of Goods Available for Sale $29, 939 

(New) Inventory (at close of period) 3,850 

Cost of Goods Sold $26,089 

In the work sheet, the old inventory, purchases, and freight 
in are shown as expenses in the profit and loss debit column. 
By placing the new inventory in the credit column, it acts as a 
subtraction, thereby reflecting the cost of goods sold in the 
net profit or net loss. Briefly, the new inventory, as a credit 
in the profit and loss column, prevents the cost of goods sold 
from being overstated. 

8. Summarizing the Work Sheet. 

After all adjustments have been entered in the adjustment 
column and it is balanced; after all trial balance amounts, 
adjusted or unadjusted, have been transferred to the proper 
columns; and after all adjustments not affecting the trial 
balance accounts have been distributed, then the debit and 
credit columns are. totaled under the headings of " profit 
and loss" and " balance sheet." 



PREPARATION OF THE WORK SHEET 89 

9. Balancing the Profit and Loss Columns. 

The debit and credit profit and loss columns will invariably 
differ in total amount. A credit total in excess of a debit 
total means income has been greater than the expense for 
the period, consequently, a net profit is the result. The 
amount of the net profit is then entered in the debit column 
to balance with the credit column. 

A debit total greater than a credit total signifies that a 
greater amount of expense has been incurred than the amount 
of income earned, resulting in a net loss. Such being the 
case, the net loss is entered in the credit column to balance the 
debit column. 

10. Balancing the Balance Sheet Columns. 

If the balance sheet debit column is greater than the credit 
total, obviously, the asset values are greater than the sum of 
the liabilities plus the ownership. The difference represents 
an increase of ownership as a result of a net profit having been 
made. The net profit figure already entered in the profit and 
loss debit column is now entered in the balance sheet credit 
column to balance that column (refer to illustration on page 86) . 

A balance sheet credit column showing a total greater than 
the debit column total signifies that the rights to the assets 
are greater than the value of the assets. Consequently, the 
ownership equity must be decreased. And the amount by 
which it is decreased is the amount of the net loss shown in 
the profit and loss credit column (see illustration on page 90). 

11. The Completed Work Sheet. 

With the net profit or net loss figure added to the balance 
sheet columns the mechanical accuracy is proved. It does 
not necessarily mean that it is the accurate profit or loss. 
Some operating account may have been confused with a 
capital account during the process of preparing the work sheet. 
Such an error would not prevent obtaining a balanced work 
sheet, but it would mean an inaccurate net profit or net 
loss figure. 

The completed work sheet now provides all the necessary 
figures from which are prepared: 



90 



COST FINDING FOR ENGINEERS 





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PREPARATION OF THE WORK SHEET 



91 



L Accounting Statements: 

a. Statement of income, profit and loss. 
6. Statement of ownership. 
c. Balance sheet. 

2. Journal entries to close the operating accounts in the 
ledger: 

a. Adjusting journal entries. 
6. Closing joiirnal entries. 

The preparation of accounting statements and closing entries 
are taken up in detail in Chaps. X and XI. 

To bring into the ledger accounts the value of the new 
inventory, and the necessary credit to the Profit and Loss 
account which prevents the cost of goods sold from being 
overstated, the adjusting entry is as follows: 

General Journal 



19 
Feb. 



28 Inventory $6,45008 

Profit and Loss $6 , 450 08 

To set up the value of the new 
inventory, and to adjust the cost 
of goods available for sale through 
the Profit and Loss account. 



Questions 

1. Define a work sheet. 

2. What is meant by "unrecorded" transactions? 

3. Why is the new inventory considered as an unrecorded item at the 
end of any accounting period (except the perpetual inventory) ? 

4. What is the form of the work sheet? 

5. State the purpose of the work sheet. 

6. Enumerate the advantages of the work sheet. 

7. Describe the steps involved in the preparation of the work sheet. 

8. In what manner does the principle of debit and credit enter into 
the preparation of the work sheet? 

9. What amounts are transferred from the trial balance debit column 
to the profit and loss debit column? To the balance sheet debit column? 

10. What amounts are transferred from the trial balance credit column 
to the profit and loss credit column? To the balance sheet credit 
column? 

11. The amount in the trial balance representing the balance in the 
owner's Personal account is transferred to what other column in the 
work sheet? 

12. What would be the effect of placing an expense amount in the 
balance sheet debit column? 



92 COST FINDING FOR ENGINEERS 

13. What would be the effect of placing a liability amount in the 
profit and loss credit column? 

14. Explain why the new inventory as an adjustment is transferred to 
the profit and loss credit column, and to the balance sheet debit column. 

15. What adjusting journal entry is necessary to reflect in the ledger 
accounts the new inventory value as shown in the work sheet? 

16. How can you ascertain from the work sheet that a profit has been 
made? A loss? 

17. If the balance in the profit and loss columns denotes a profit, in 
what other column must the profit also appear? 

18. If the balance in the profit and loss columns indicates a loss, in 
what other column must the loss also be shown? 

19. If each pair of columns in the work sheet show the same totals, 
is it proof that the net profit or net loss is accurate? 

20. After the work sheet is completed, what use is made of the amounts 
appearing in the: 

a. Adjustment columns? 

b. Profit and loss columns? 

c. Balance sheet columns? 

21. What is the adjusting entry necessary to record the new or closing 
Inventory value? Explain the purpose of this entry in detail. 



CHAPTER VII 

ACCRUALS AND PREPAYMENTS 

1. Adjustments at the Close of the Accounting Period. 

The reasons for considering the new inventory as an adjust- 
ment at the close of each accounting period have been described. 
Certain other accounts also require adjustment at the close of 
each accounting period. The necessity for adjustment arises 
from the effort to obtain, as closely as possible, an accurate net 
profit or net loss figure. 

Other adjustments to be considered are as follows: 

1. Accrued expense. 

2. Accrued income. 

3. Prepaid expense. 

4. Prepaid income. 

5. Depreciation. 

6. Reserves. 

The first four adjustments are described in this chapter. 
The treatment of depreciation and reserves is left to later 
chapters. 

2. The Cash versus the Accrual Basis. 

Net income may be computed upon the cash or accrual 
basis. That is to say, that the books of account are kept 
upon one or the other of these plans. The cash basis of 
account keeping considers the actual cash received as the 
income for the period, and as expenses only the amount of 
cash disbursed. The accrual basis considers all earnings as 
income, whether the receipt of cash is immediate or deferred; 
and all expenses are recorded as soon as incurred even though 
payment may be deferred. 

Business concerns engaged in trading or manufacturing 
have been required, since the advent of the Federal income 
tax laws, 1 to operate their accounting systems on an accrual 
basis, if inventories are a material income producing factor 
in the production, purchase, or sale of merchandise of any 

1 1934 Act, Regulations 86, Arts. 41-42. 

93 



94 * COST FINDING FOR ENGINEERS 

kind. The accrual basis is briefly contrasted with the cash 
basis in the following table: 

Accrual basis Cash basis 

1. Income for the period includes Income for the period is con- 
both cash and credit sales, as well sidered only as cash receipts from 
as any other source of earnings sales and other income sources of 
applicable to the period, whether the period. 

or not the cash is received in the 
present or future periods. 

2. Inventories at the beginning and Inventories are not considered 
at the close of the accounting in arriving at the net profit or net 
period are used to ascertain accu- loss for the period. 

rately the cost of goods sold, which 
affects net profit or net loss. 

3. Accrued expense and accrued in- Accruals are not considered, 
come items are recorded on the 

books prior to arriving at the net 
profit or the net loss for the period. 

4. Amounts of expense paid or in- Adjustments for items of prepaid 
come received, any portion of expense and prepaid income are 
which is not applicable to the not considered. 

present period, are deferred to 
subsequent periods. 

The accrual basis will cause the net profit or net loss for 
the period to be shown accurately, while the cash method is 
misleading and, obviously, its use must be discouraged. 

3. Accruals. 

Accruals are items of expense or income, unrecorded prior 
to the close of the accounting period, which must be recorded 
in order to show the full amount of expense or income appli- 
cable to the period. 

4. Accrued Expense. 

An accrued expense is an item of expense applicable to, but 
unrecorded at the close of, the accounting period. 
Some examples of accrued expenses are : 

a. Wages, salaries, and commissions due but unpaid. 

6. Liability for taxes unpaid. 

c. Unpaid interest accumulated on notes, bonds, and 
mortgages payable. 

d. Unpaid water rent, power expense, and royalties. 
A business may have received the services from its employ- 
ees, yet not have paid them at the close of the accounting 



ACCRUALS AND PREPAYMENTS 



95 



period. Tax, interest, and royalty expenses may have 
accumulated during the fiscal period, hence, are proper charges 
to the period even though unpaid. To ignore such items of 
expense would be to understate the expenses for the accounting 
period, as well as to understate the liabilities. The prepara- 
tion of accurate financial statements requires adjustments for 
these items and other similar ones. 

For the purpose of illustration assume that services amount- 
ing to $237.41 have been performed by the employees of a 
plant for the week ended Dec. 31, 19 . This date also 
coincides with the close of the fisal year. The custom of the 
plant is to pay every two weeks. Hence, the next pay day 
will be on Jan. 7 of the following year. The services rendered 
in terms of dollars and cents are an expense for the year ended 
Dec. 31, 19 . Since the employees will not be paid until the 
week following, an adjusting entry is necessary to record this 
expense. The proper entry in the general journal is as 
follows: 

General Journal 



19 
















Dec. 


31 


Wages 




$237 


41 










Wages Payable 
















or 
















Accrued Wages 








$237 


41 






To charge the period with the ex- 
















pense of wages from Dec. 24, to Dec. 
















31, and to set up liability for the pay- 
















ment of same. 













The ledger accounts affected by the adjusting entry are 
shown below: 

Wages 



19 
























Oct. 


1 


Cash 




$ 567 


89 
















15 


i 




756 


65 
















29 


t 




842 


20 














Nov. 


12 


t 




847 


10 
















26 


( 




798 


67 














Dec. 


10 


t 




765 


22 
















24 


t 




920 


20 
















31 


Accrued 




237 


41 






















$5,735 


34 















96 



COST FINDING FOR ENGINEERS 
Accrued Wages 















19 
Dec. 


31 


Accrued 




$237 


4 

41 



After the adjusting entry has been posted, the expense 
account, Wages, reflects the total cost for wages for the period 
ended Dec. 31, 19 . The total wages paid in cash plus the 
accrued wages are shown as an expense in the income, profit and 
loss statement. The amount of $237.41, shown in the Wages 
Payable account is shown in the balance sheet under the 
caption of " current liabilities/ 7 and under the subcaption 
of " accruals payable. " 

If the payroll at Jan. 7, 19 , amounted to $736.09, at this 
date of payment, the following entiy would be made : 

Cash Disbursements Journal 



19 


















Jan. 


7 


Accrued Wages 


Wages for two weeks' 




$237 


41 










Wages 


period ended Jan. 7, 




498 


68 










Cash (Cr.) 


19. 








$736 


09 



Thus, the liability for wages due at Dec. 31, 19 is cancelled, 
and the services rendered for the first week in the next account- 
ing period are recorded as an expense. 

5. Accrued Income. 

Accrued income is income applicable to the accounting 
period but unrecorded at the close of period. 

Some examples of accrued income are as follows: 

a. Interest accumulated on notes receivable and invest- 
ments but not received. 

&. Commissions earned by the business but not collected. 
c. Rentals due the business but uncollected. 
To ignore such items would understate the income and the 
assets of the business for the accounting period, and con- 
sequently misstate the net profit and ownership in the finan- 
cial statements. 

An example of accrued income may be seen in the following 
illustration: A note for 90 days with interest at 6 per cent, 



ACCRUALS AND PREPAYMENTS 



97 



dated Nov. 1, 19 , was received in settlement of a customer's 
account. At Dec. 31, 19 , the end of the accounting period, 
the note had accumulated 60 days' interest amounting to $5. 
This amount represents income applicable to the fiscal period 
ended Dec. 31, 19, 

The adjusting entry to record the accrued income is as 
follows: 

General Journal 



19 
Dec. 



31 



Interest Receivable 

or 

Accrued Interest 
Interest Earned 

To record interest earned to 
31, 19, on $500, 90-day note (c 
interest. 



Dec. 

> 6% 



$500 



$500 



After the adjusting entry has been posted, the accounts 
affected appear as follows : 

Interest Receivable 



19 
Dec. 


31 


Accrued 




$5 


00 















Interest Earned 















19 
























May 


10 


Cash 




$10 


50 














Aug. 


3 


u 




6 


60 














Nov. 


19 


a 




4 


50 














Dec. 


31 


Accrued 




5 


00 






















$26 


60 







The total interest payments received in cash plus the 
accrued interest are shown as $26.60, interest earned, under the 
caption of " incidental income " in the statement of income, 
profit and loss. The accrued interest income, amounting to 
$5, at Dec. 31, 19 , represents an amount owing to the busi- 
ness. It is similar to an account receivable, and since it js 



98 



COST FINDING FOR ENGINEERS 



due within 30 days, is shown in the balance sheet under the 
current asset group. 

At Jan. 30, 19 , when the note matures, the interest 
received will be recorded as follows: 



Cash Receipts Journal 



19 


















Jan. 


30 


Interest Receivable 


Interest received on 








$5 


00 






Interest Earned 


90-day, 6% $500 








2 


50 






Cash (Dr.) 


note dated Nov. 1, 




$7 


50 












19. 













The income applicable to the accounting period after Dec. 
31, 19 , is $2.50, and is so recorded in the above entry. 

6. Prepayments. 

A prepayment is an item of expense or income, which has 
been recorded on the books prior to the close of the accounting 
period, a portion of which is to be considered as expense or 
income in the following period or periods. 

If an item of expense is paid for in advance for a period 
of 3 years, obviously, the only equitable basis for charging 
the expense against operations would be to spread it over a 
period of 3 years. No one of the 3 years, then, would be 
burdened with an undue proportion of expense from the 
particular item. Similarly, income should be prorated when 
received in advance, and when it is applicable to more than one 
accounting period. 

7. Prepaid Expense. 

Prepaid expense is an expenditure recorded in the books 
prior to the close of the accounting period, a portion of which 
should be charged against a following accounting period or 
periods. 

It is unnecessary to charge expense items to prepaid expense 
accounts, if they are entirely utilized within the same account- 
ing period the expenditures are incurred. In such cases, 
the expense account itself should be charged. 



ACCRUALS AND PREPAYMENTS 



99 



Some accounts which record items of prepaid expense are 
as follows: 

a. Prepaid Insurance. 

6. Prepaid Advertising. 

c. Prepaid Discount. 

d. Supplies Inventory. 

As an illustration of a prepaid expense, a policy for fire 
insurance on a building was purchased Jan. 1, 19 , covering a 
period of 3 years. A premium of $600 was paid in advance. 

The entry to record the expenditure should be as follows: 

Cash Disbursements Journal 



19 


















Jan. 


1 


Prepaid Insurance 


Insurance premium on 




$600 


00 










Cash (Cr.) 


building for 3 years 








$600 


00 








to Dec. 31, 19. 













The entry to adjust the Prepaid Insurance account at the 
close of the first accounting period, EXec. 31, 19 , should be 
as follows; 

General Journal 



19 
















Dec. 


31 


Insurance 




$200 


00 










Prepaid Insurance 








$200 


00 






To charge operations with the pro- 
















portion of prepaid insurance appli- 
















cable to the fiscal year 19 , 













Prepaid Insurance 





















* 






19 












19 












Jan. 


1 


Cash 




$600 


00 


Dec. 


31 


To Insurance 




$200 


00 














u 


31 


Balance 




400 


00 










$600 


00 










$600 


00 


19 
























Jan. 


1 


Balance 




$400 


00 















100 



COST FINDING FOR ENGINEERS 
Insurance 



19 
























Dec. 


31 


From Prepaid 
























Insurance 




$200 


00 















After the adjusting entry has been made and posted, the 
debit of $200 to the Insurance account represents the insur- 
ance expense for the year. This amount is shown in the 
statement of income, profit and loss. 

In posting the credit to the Prepaid Insurance account, 
the debit balance in that account is reduced to $400. It 
represents the unused portion of the expense item applicable 
to the next two accounting periods. Prepaid insurance in the 
amount of $400 is shown on the balance sheet at Dec. 31, 19 , 
the close of the first accounting period, as an asset, under 
the grouping of prepaid expenses. It is shown as an asset 
because it represents cash tied up in the insurance protection. 
The consideration of this amount as an expense is postponed 
until the two subsequent years. 

Misrepresentations are reflected in the financial state- 
ments if the proper consideration is not made for prepaid 
expense items. In the statement of income, profit and loss, 
the expenses would be overstated, and the assets in the 
balance sheet would be understated. 

Sometimes the prepaid expense account is not debited when 
the expenditure is incurred. Instead, the expense account is 
alternatively debited. Even though this may be the case, it 
does not prevent the proper adjusting entries from being 
made. 

If an expenditure for $675 were made for advertising pam- 
phlets, which provided for 2 years' supply, the entry to 
record the expenditures might be made as follows: 

v Cash Disbursements Journal 



19 


















Mar. 


16 


Advertising (expense) 


W. C. Arthur & 




$675 


OC 










Cash (Cr.) 


Co. for advertis- 








$675 


00 








ing literature. 













ACCRUALS AND PREPAYMENTS 



101 



The adjusting entry at the close of the accounting period; 
provided that one-half of the literature was still on hand, 
would be as follows: 

General Journal 



19 
















Dec. 


31 


Prepaid Advertising 




$337 


50 










Advertising 








$337 


50 






To record the cost of unused adver- 
















tising literature deferred to the next 
















accounting period. 













The debit balance in the expense account, Advertising, is 
thus reduced to $337.50, the advertising cost for the year. 
In setting up the new account, Prepaid Advertising, an amount 
of $337.50 is treated as an unused expense item at Dec. 31, 19 . 
The prepaid amount is shown in the balance sheet as pre- 
viously described. 
8. Prepaid Income. 

Prepaid income is a receipt recorded in the ledger prior 
to the close of the accounting period, a portion of which 
should be credited to a subsequent accounting period or 
periods. 

It is unnecessary to credit a prepaid income account if 
the income is earned entirely within the period it is received. 
The receipt of such income should be credited directly to an 
income account. 

Adjustments for items of prepaid income generally do not 
occur as frequently as in the case of prepaid expense. Some 
of the accounts recording prepaid income, which require 
adjustment at the close of the accounting period, are as 
follows : 

a. Prepaid Rentals Received. 

6. Prepaid Subscriptions Received. 

c. Prepaid Interest and Discount. 

In illustrating the entries pertaining to prepaid income, the 
basement of a building which was occupied by a machine 
shop was rented for storage purposes on Oct. 15, 19 . A 
rental of $100 monthly was received in advance. 

The entry to record the receipt of cash for the monthly 
rental on Dec. 15 would be as follows: 



102 



COST FINDING FOR ENGINEERS 
Cash Receipts Journal 



19 


















Dec. 


15 


Prepaid Rentals Re- 


Basement rent for 








$100 


00 






ceived 


month ended Jan. 
















Cash (Dr.) 


15, 19. 




$100 


00 







If the accounting period ended at Dec. 31, 19 , then the 
entire amount of $300 received up to Dec. 15, 19 , has not 
been earned at Dec. 31, 19. Of the total $300 received, $50 
is unearned at the close of the accounting period. The adjust- 
ing entry is as follows: 

General Journal 



19 
















Dec. 


31 


Prepaid Rentals Received 




$250 


00 










Rental Income 








$250 


00 






To credit income with the propor- 




* 












tion of prepaid rentals applicable to 
















the fiscal year 19 . 













The ledger accounts illustrating the transactions are as 
follows: 

Prepaid Rentals Received 



1& 












19 












Dec. 


31 


To Rentals 
























Earned 




$250 


00 


Oct. 


15 


Cash 




$100 


00 




31 


To balance 




50 


00 


Nov. 


15 


it 




100 


00 














Dec. 


15 


(I 




100 


00 










$300 


00 










$300 


00 














19 
























Jan. 


1 


Balance 




$ 50 


00 



Rentals Earned 



















From 




















19 
Dec. 


31 


Prepaid Ren- 
tals Received 




$250 


00 



ACCRUALS AND PREPAYMENTS 



103 



As a result of posting the adjusting entry the income from 
rentals for the year ended Dec. 31, 19 , is shown in the 
amount of $250. This earning appears in the statement of 
income, profit and loss. The posting also causes the Prepaid 
Rentals Received account to show a credit balance of $50. 
This balance appears in the balance sheet under the heading 
of " deferred credits to operation/' The balance represents 
unearned income for the fiscal year ended Dec. 31, 19 . The 
$50 is said to be deferred or to be held over until the next 
fiscal period when it will be considered then as an earning. 

Both the income, profit and loss statement and the balance 
sheet will contain a misstatement of fact if prepaid income 
items are not properly adjusted at the close of each accounting 
period: the former statement, in that income will be over- 
stated; the latter, in that liabilities will be understated and 
ownership overstated. 

The method just described for handling prepaid income and 
its adjustment is in strict keeping with good accounting prac- 
tice. An alternative method is sometines used, whereby 
the income account is used to record the current receipts. 
The monthly entries under such method would be as follows: 

Cash Receipts Journal 



19 


















Dec. 


15 


Rentals Earned 


Basement rent for 








$100 


00 






Cash (Dr.) 


month ended Jan. 




$100 


00 












15, 19. 













The adjusting entry necessary to defer the unearned portion 
of this rental in the present accounting period to the following 
period would be as follows: 

General Journal 



Dec. 


31 


Rentals Earned 




$50 


F 
00 










Prepaid Rentals Received 








$50 


00 






To defer the proportion of rentals re- 
















ceived in advance applicable to the fol- 
















lowing period* 













104 COST FINDING FOR ENGINEERS 

By this method, the credit balance remaining in the income 
account, after posting the adjusting entry, represents the total 
income earned for the period. The $50 set up in the Prepaid 
Rentals Received account represents the income deferred 
until the next period. Since the amount in the prepaid ac- 
count is an earning in the first month of the following period, an 
entry should be made during January to record this fact. 
This entry would be as follows: 

General Journal 



19 

Jan. 



15 Prepaid Rentals Received $5000 

Rentals Earned $50 00 

To return the deferred income at the 
close of the last fiscal period to earned 
income for present period. 



9. Prepayments and Accruals in the Work Sheet. 

When there are prepayments and accruals to consider at the 
close of an accounting period, it is important to know how 
to make the proper adjustments in the work sheet. The 
adjustments are entered in the adjustment column opposite 
the account in the trial balance ^requiring adjustment. A new 
account must be set up below the trial balance accounts, if 
there is no account in the trial balance against which the 
adjustment can be made. 

Illustration. At the close of the 6-month period, June 30, 
19 , it was necessary to consider the following adjustments: 

a. Inventory of merchandise on hand $2 , 650 . 00 

b. Insurance unexpired (prepaid expense) 160.00 

c. Office stationery and supplies unused (pre- 

paid expense) 40 . 00 

d. Prepaid rentals received applicable to the 

next accounting period (prepaid income) 35.00 

e. Estimated state sales tax (accrued expense) 16.76 
/. Wages due but unpaid (accrued expense).. 75.00 

Commissions earned but not received 

(accrued income) 19 . 50 



ACCRUALS AND PREPAYMENTS 



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106 COST FINDING FOR ENGINEERS 

Questions 

1. State the purpose of considering various types of adjustments at 
the close of each accounting period. 

2. The argument is sometimes presented that the adjustments 
applicable to one accounting period approximately equal the adjustments 
pertaining to subsequent periods and therefore, all adjustments may be 
ignored. Comment upon this argument. 

3. Describe the accrual basis for operating an accounting system. 

4. In what respects does the accrual basis differ from the cash basis 
of keeping accounting records? 

5. Define accrued expense. Give some illustrations of accounts 
affected by this type of adjustment. 

6. How is an accrued expense item handled in the work sheet? 

7. What adjusting journal entry is necessary properly to reflect an 
accrued expense adjustment in the ledger? 

8. What is accrued income? Give several examples. 

9. What columns in the work sheet are affected by an accrued income 
adjustment? 

10. What adjusting journal entry is made for an accrued income item 
so that when posted the ledger accounts will be properly adjusted? 

11. Define prepaid expense. Give several illustrations. 

12. Under what account classification would a prepaid expense be 
placed? 

13. State the manner in which an adjustment is made in the work sheet 
for a prepaid expense item. Also state what would be the adjusting 
journal entry. 

14. If an expense account is charged with an expenditure 'which is 
applicable to more than one accounting period, what adjusting journal 
entry would be necessary to reflect the prepaid expense item? 

15. Define prepaid income. Name some different accounts affected 
by such an adjustment. \ 

16. State the manner in which an adjustment is made in the work sheet 
for a prepaid income item. 

17. What adjusting journal entry is required to reflect the adjustment 
for prepaid income in the ledger? 

18. If earnings are credited to an income account, a portion of which 
is applicable to a subsequent period or periods, what adjusting journal 
entry would be necessary to reflect the prepaid income? 

19. What principle determines whether a prepaid expense account or 
only an expense account should be charged when an expenditure is made ? 
Whether a prepaid income account or only an income account should be 
credited when earnings are recorded? 

20. In what manner would the profit and loss statement and the 
balance sheet be affected in ignoring the following adjustments? 

a. Accrued expense. 
6. Accrued income. 

c. Prepaid expense. 

d. Prepaid income. 



CHAPTER VIII 
ACCOUNTING FOR DEPRECIATION AND DEPLETION 

1. The Nature of Depreciation. 

Depreciation is the constant diminution in the value of 
tangible fixed assets. Depreciation does not cease when 
operations are stilled, but continues steadily on without 
abatement. Little wonder, then, the effort exerted in industry 
to decrease plant idleness. Depreciation is frequently even 
more rapid with the non-use of equipment, because proper 
maintenance and repairs often are neglected. 

The deterioration of equipment results from four major 
causes as follows: 

a. Use. 

6. Possession (non-use). 

c. New inventions. 

d. Style changes. 

One authority on accounting has given the first two causes 
the name of physical depreciation; the last two the term 
" functional depreciation. " l Diminution in the value of 
any piece of equipment goes with use and existence. The 
value of an asset subject to depreciation likewise is dependent 
upon its worth as an adequate productive agent. New inven- 
tions cause machines to become obsolete over night. Style 
changes frequently bring about the inadequacy of the 
equipment used in the production of goods. Obsolescence 
is thus a form of depreciation. 

2. The Necessity for Considering Depreciation. 

All outlays of cash, all expenditures, are, in the final analysis, 
expense items. Expenditures for wages, rent, power, supplies, 
etc., are immediate expenses. Expenditures for all types 
of equipment are capitalized and called assets, which means 
that the cost is a form of deferred expense. The cost of tangi- 
ble fixed assets is spread over the period of their useful life. 
Each accounting period an adjusting entry is made, whereby a 

1 KESTER, R. B., " Accounting Theory and Practice," Vol. II, rev., 
Chap. XII, p, 231, 

107 



108 



COST FINDING FOR ENGINEERS 



portion of the cost value of the asset is charged off as an 
operating expense. This periodic charge is termed deprecia- 
tion. The periodic depreciation becomes a cost of operation, 
and is a fixed charge. By a fixed charge is meant the con- 
tinued existence of an expense irrespective of whether the 
plant operates 24 hours a day, half time, or is standing idle. 
There is another reason why it is imperative to provide 
for depreciation. By charging operations with depreciation 
and crediting a reserve for the same amount of depreciation, 
one provides against an impairment of capital invested in the 
tangible fixed assets. This principle may be seen in the follow- 
ing illustration. 

A balance sheet is shown just after the owner engaged in 
business: 

FORM 28 

OTTO NELSON 

BALANCE SHEET 

Jan. 2, 19 
Assets Liabilities and Ownership 



Cash $ 10,000.00 

Inventory Merchan- 
dise 50,000.00 

Equipment 50,000.00 

$110,000.00 



Accounts Payable. .. $ 10,000.00 
Otto Nelson, Capital 100 , 000 . 00 



$110,000.00 



Consider the equipment to have an estimated useful life of 5 
years. Each year depreciation amounting to $10,000 should 
have 'been charged as an expense to operations. Actually, 
what transpired is shown in the following table: 



Year 


Depreci- 
ation 
charged 
off 


Net profit 
or * net 
loss 


With- 
drawals 


Capital 
invested 


Beginning first 








$100,000.00 


End of first 


None 


$30,000 00 


$25,000.00 


$105,000.00 


End of second 


None 


20 000 00 


15 000 00 


110 000 00 


End of third 


None 


10,000.00 


10,000.00 


110,000.00 


End of fourth 


None 


(Loss) 


10,000 00 


90,000 00 


End of fifth 


None 


10,000.00 
15,000.00 


15,000.00 


90,000 00 













ACCOUNTING FOR DEPRECIATION AND DEPLETION 109 



At the end of 5 years the amount of the neglected depreciation 
is $50,000, and the balance sheet at this time still shows an 
asset value of $50,000 for the equipment. But an appraisal 
of the equipment shows that it has reached the scrap value 
stage, and that it should be replaced at once for economical 
production. 

FORM 29 

OTTO NELSON 

BALANCE SHEET 

Jan. 1, 19 
Assets Liabilities and Ownership 



Cash $ 7,000.00 

Accounts Receivable . 19 , 000 . 00 
Inventory, Merchan- 
dise 28,000.00 

Equipment 50,000.00 

$104,000.00 



Accounts Payable. .. $ 14,000.00 
Otto Nelson, Capital 90 , 000 . 00 



$104,000.00 



The balance sheet also shows that there is insufficient 
cash on hand to finance the replacement of the equipment. 
In neglecting to charge depreciation as an operating expense, 
net profits were overstated in the first three and the fifth years; 
net loss understated in the fourth year. This misstatement 
of the net profit and net loss figures each year created a 
false impression as to the financial welfare of the business. 
This in turn resulted in the withdrawal of invested capital 
instead of profits. The situation of Mr. Nelson's business is 
further aggravated by the fact that the equipment must be 
replaced. While it shows a book value of $50,000, the actual 
value is scrap. Provision for the replacement of the depre- 
ciated assets has been neglected in withdrawing $65,000 
profits (shown as such) and $10,000 capital originally invested. 
If depreciation had been properly considered, but $15,000 
would have been made during the 5-year period. The only 
way new equipment can be obtained to replace the worn-out 
units is to invest or borrow additional capital. A proper 
provision for depreciation would have prevented the necessity 
for obtaining a loan, or at least not as large an amount as is 
necessary. 



110 COST FINDING FOR ENOINEERS 

3. The Factors of Depreciation. 

Certain factors must be known before the rate of deprecia- 
tion can be calculated. These factors are as follows: 

Original cost. 

Estimated useful life. 

Scrap value. 

Original cost means the invoice price less any discounts, 
plus all other expenses incident to placing the asset in condition 
for use. Such expenses include freight and cartage in, 
materials, and labor in setting up the asset, where 
necessary. 

What the estimated useful life of an asset is depends upon 
many other circumstances. The life of two identical machines 
in different plants may vary several years. Repairs and 
maintenance policy, more rapid deterioration due to plant 
idleness, hours worked each day, and the treatment received 
from the operators are factors causing the life of a machine 
to vary. Climatic conditions affect the life of assets exposed 
to the elements. Quality of roads and topography modify the 
life of delivery equipment. 

Scrap value is the estimated value placed on the asset 
when it is purchased, as to the value it will bring after it 
has served its useful life. Scrap value is the selling price 
or trade-in-price of an asset less all costs of delivering it to 
the buyer. 

Knowing the cost and estimating the useful life and scrap 
value permit a periodic depreciation rate and amount to be 
ascertained. Frequently, past experience will enable the 
engineer to arrive at the number of years of useful life 
and the scrap value with much accuracy, unless so-called 
functional depreciation becomes a factor. Customary rates 
on different types of assets subject to depreciation are fre- 
quently adopted by trade associations. The customary rate 
used by the trade or industry is usually the rate applied in 
accounting for depreciation, because such a rate usually 
receives the sanction of the Federal income tax authorities 
for use in preparing income tax returns. 

There have been many ways devised to charge off deprecia- 
tion. Whatever the method may be, the factors of cost, 
estimated life, and scrap value must be known. 



ACCOUNTING FOR DEPRECIATION AND DEPLETION 111 

4. The Problem of Depreciation. 

Very few subjects in accounting can attract the attention 
of the engineer as can depreciation, because it is primarily a 
valuation problem. Depreciation is an ever-present problem 
confronting the engineer. It offers some of the most intricate 
and perplexing questions imaginable for practical and intelli- 
gent answers. Accounting for depreciation is relatively 
simple when the plan, rate, and policy have been worked out 
by the engineer. Every industry, every concern in a given 
industry, has its peculiar depreciation problems. In the pres- 
ent machine era, rapid inventions are challenging the engineer 
in regard to the best method of depreciating the obsolete 
arid undepreciated cost of equipment. 

5. Depreciation Methods in Practice. 

a. Straight-line Method. 

The most common method of charging off depreciation is 
called the " straight-line method. " Innumerable concerns 
have adopted this method because of its simplicity. Net cost 
of the asset subject to depreciation is divided by the estimated 
life to give the periodic rate. The depreciation charge is 
uniform for each accounting period. The method derives its 
name from the depreciation line, which is straight when graph- 
ically plotted. 

6. Production Method. 

A gas company in the Pittsburgh district uses production 
as the basis for their depreciation charge in the production 
department. On production equipment 4 cents deprecia- 
tion is charged off for each 10,000 cubic feet of gas produced. 
In the transportation department 3 cents depreciation is 
charged on capital equipment for each 10,000 cubic feet 
transported. 

c. Gross Income Method. 

Electric power corporations whose accounts are under 
surveillance of the State Public Service Commissions are 
required to set aside a certain percentage of gross income to 
provide for depreciation. The percentage figure is left to the 
discretion of the corporation officials. 



112 



COST FINDING FOR ENGINEERS 



d. Composite Life Method. 

A manufacturer of plumbing supplies makes use of the 
composite life method as a basis for computing periodic 
depreciation charges. The method is used to ascertain the 
mean length of time necessary to depreciate completely the 
plant as a whole. The use of the composite method does not, 
however, eliminate the necessity for depreciation reserves 
for the various groups of assets dissimilar in nature, unless an 
equipment ledger is maintained. The method is as follows: 



Assets 


Cost value 


Estimated 
life, years 


Scrap value 


Buildings 


$ 60,000 


40 


$2,000 


Machinery 


100,000 


10 


4,000 


Tools 


4,000 


4 


200 












$164,000 







Assets 


Life, 
years 


Value to 
depreciate 


Rate of 
depreci- 
ation, per 
cent 


Annual 
depreci- 
ation, 
straight 
line 


Buildings 


40 


$ 58,000 


2K 


$ 1,450 00 


Machinery 


10 


96,000 


10 


9,600.00 


Tools 


4 


3,800 


25 


950.00 
















$157,800 




$12,000.00 



ars to depreciate the total plant, 
which represents the composite life. 



e. Working Hour Method. 

Some concerns make use of this method in connection 

t 

with machinery and automobiles. When a new machine is 
acquired, the engineer will estimate the number of hours it 
will render productive service. The periodic depreciatipn 
charge is, then, computed on this basis. Daily records of 
the total working hours are maintained. The monthly 
depreciation charge is computed by using the monthly record 
of hours worked as the numerator and the total estimated 



ACCOUNTING FOR DEPRECIATION AND DEPLETION 113 

working hours as the denominator. The fraction so formed 
taken as a percentage of the total cost gives the depreciation 
charge. In the case of automobiles, the estimated total 
mileage becomes the basis for the periodic depreciation charge. 
An example clearly illustrates this method : 

Total cost of machine to be depreciated, $3,500. 
Estimated total service hours, 29,000. 
Actual service hours during the month, 360. 

= 0.012413, or 1.2413%, the depreciation rate to be applied 



^y, OUO 

for the month. 
$3,500 X 1.2413% = $43.45, the monthly depreciation charge. 

/. The Fixed Percentage of Diminishing Value Method. 

This method is unlike the straight-line method in ' that 
a new base is used each year, to which a fixed rate is applied in 
order to ascertain the depreciation charge. Under this plan 
the yearly charge constantly decreases in amount. The 
depreciation charge is much higher in the first few years 
than in the later years of use. The strongest argument for 
this method is that the depreciation charge is decreased in 
later years when the repair charges are increasing. An 
attempt is thus made to equalize operating expenses. As a 
method it does not have a wide use and seems to be applicable 
to the automobile in a larger measure than to any other type 
of equipment. 

Since a fixed percentage is applicable to a decreasing base, 
it is impossible ever to depreciate the full cost of an asset by 
this method. If a scrap value is estimated, a formula may be 
used to compute a rate, which applied will reduce the cost to 
the scrap value in a given length of time. An example is 
illustrated as follows: , 

Cost to be depreciated, $1,000. 
Estimated useful life, 4 years. 
Estimated scrap value, $25. 



The formula is as follows: Yearly rate - 1 - 



4 / 

Substituting: 1 - \Ly- n ;^ or 1 



cost 




Extracting the fourth root with the use of logarithms: 
Log 0.025 = -2.397940, or 6.397940 - 8 



114 



COST FINDING FOR ENGINEERS 



6.397940 -8-^4 = 1.599485 - 2, or -1.599485 
Anti-log of -1.599485 = 0.3976354 

1 - 0.39763545 = 0.60236455 or the periodic depreciation rate of 
60.236% 

A table is illustrated below showing the yearly depreciation 
charge, which reduces the cost of $1,000 to the estimated 
scrap value of $25 in 4 years. 







Periodic 
charge 


Accumulated 
depreciation 


Original cost 


$1,000.00 






60.236% of $1,000.00 


602 . 36 


$602.36 


$602 36 










60.236% of $397.64 


$ 397.64 
239.52 


239.52 


841.88 










60.236% of $158.12 


$ 158.12 
95.25 


95.25 


937 13 










60.236% of $62.87 


$ 62.87 
37.87 


37.87 


975.00 












$ 25.00 




v 



g. The Sinking Fund Method. 

This is a method in which the periodic depreciation is the 
combined total of a predetermined sinking fund contribution 
and the annual theoretical accumulation of interest applicable 
to the contributions. The periodic contributions are based 
upon the cost of the asset to be depreciated. A sinking fund 
formula is required in order to ascertain the periodic contribu- 
tion, as follows: 



Original cost of asset to be depreciated 



= sinking fund contribution 



Substituting the amounts as shown in the illustration on page 149, the 
formula appears as follows: 



850.000 



(i + .06) 5 - r 

.06 



or 



$50,000 



1.33822558 - 1 
.06 



' 



$50,000 
5.637093 



This method is not widely used. It is sometimes used by 
public utility companies as a depreciation method for units 



ACCOUNTING FOR DEPRECIATION AND DEPLETION 115 



of equipment involving a heavy investment. The sinking 
fund method of computing depreciation may be used without 
an actual accumulation of a fund and the cumulative interest 
return thereon. 

The entries for the periodic depreciation are prepared from 
column (4) of the following table : 



(1) 

End of 
year 


(2) 

Periodic sinking 
fund contribution 


(3) 

Periodic interest 
(6%) on sinking 
fund contributions 


(4) 

Periodic 
depreciation 


1 


$ 8,869.82 




(2) + (3) 
$ 8,869.82 


2 
3 

4 
5 


8,869.82 
8,869.82 
8,869.82 
8,869.82 


$ 532.19 
1,096.31 
1,694.28 
2,328.12 


9,402.01 
9,966.13 
10,564.10 
11,197.94 




$44,349.10 


$5 ; 650. 90 


$50,000.00 



6. Other Methods of Estimating Depreciation Charges. 

The above-described methods are probably the most com- 
mon ones used. A few other methods, peculiar in nature, 
will be mentioned to illustrate how depreciation is taken care 
of in some industries. 

The " guarantee plan" is a method found in use in the rock- 
crushing and the carpet-weaving industries. The machin^ 
ery manufacturers guarantee that the machinery which they 
sell will have a life of so many years. Using this guarantee 
period as the estimated useful life, the per annum depreciation 
charge may be readily computed. 

Another method, known as the " sliding-scale " method, is 
rather odd in its nature because it is so different from the 
plans described in the preceding section. It is usually found 
in use in large concerns where the fixed asset values subject 
to depreciation represent a large investment; for example, in 
the steel industry where hundreds of thousands or millions 
of dollars may represent the fixed asset investment. By this 
method, an attempt is made to adjust the periodic deprecia- 
tion charges with the profits earned. It is not a method of 
ignoring depreciation in years of lean profits and burdening 
the years in which large profits are earned with a heavy 



116 



COST FINDING FOR ENGINEERS 



depreciation charge. Rather, it is a method of adjusting 
the depreciation charge within the lower and upper limits in 
terms of dollars and cents as calculated by the engineer and 
the accountant. After all the factors pertaining to deprecia- 
tion are known, a sliding scale basis may be computed, as 
illustrated below: 

Maximum Depreciation 

Charge for the Year 

$300,000 




Minimum Depreciation 

Charge for the Year 

$100,000 



The minimum charge may be based on the earning of no 
profit or upon a certain loss which may be incurred. For 
each $1,000 profit or fraction thereof earned, a predetermined 
amount of depreciation is charged off, but in no year is the 
depreciation charge to be less than the minimum or to exceed 
the maximum. 

7. Depreciation Based upon Replacement Value. 

The general principle followed in computing depreciation is 
to apply the estimated rate to the original cost value. It is 
the practice of some industrial concerns and many public 
utility companies to depreciate their tangible fixed assets by 
applying the per annum rate to the estimated replacement or 
reproduction value. The replacement value or reproduction 
value is the estimated cost of replacing the tangible fixed asset 
at the date when the appraisal is made. The replacement 
value is usually arrived at by an independent appraisal made 
by appraisal companies which employ engineers who are 
skilled in making valuation estimates of the present physical 
condition and reproduction cost of various tangible fixed assets. 



ACCOUNTING FOR DEPRECIATION AND DEPLETION 117 

When depreciation is based upon the reproduction value, 
which value is in excess of the original cost value, there is a nice 
problem raised with respect to the method to be used in 
accounting for the periodic charge. To debit the Depreciation 
account with the amount of depreciation based upon the 
reproduction value, which value is in excess of original cost, 
obviously increases the periodic depreciation charge. Should 
this entire amount of depreciation so computed be considered 
as an operating expense? The answer is that the depreciation 
computed in this manner may be and is treated as an operating 
expense by some concerns, particularly public utility com- 
panies. For Federal income tax purposes, however, the 
allowable deduction for depreciation is based upon the original 
cost of the asset. This subject is treated at further length 
in Chap. XIV, under the heading of Equipment Appraisals. 

8. Actual versus Theoretical Depreciation. 

By actual depreciation is meant the difference between the 
cost of an asset and its present estimated value from an effi- 
ciency point of view. Actual value is determined by appraisal. 
Theoretical depreciation is the total amount of accumulated 
depreciation which has been charged off at the close of each 
accounting period. Theoretical depreciation is recorded on 
the books of account. Seldom, if ever, are theoretical and 
actual depreciation values the same at any time during the 
life of an asset. 

Actual depreciation usually coincides with the efficiency of 
the asset. In many cases the efficiency of the asset is not 
materially reduced until more than 50 per cent of its estimated 
life has elapsed. Of course, efficiency is affected by repairs 
and maintenance policies. 

Theoretical depreciation arises from the effort made to 
account for depreciation. Accounting for depreciation involves 
two steps; first, an estimation of the amount of the periodic 
charge by some arbitrary method best suited to the asset in 
question; second, recording the periodic charge on the books. 
Probably the best method to account for depreciation is to 
spread the cost of the asset uniformly over its estimated life. 

It can easily be seen by the engineer that actual and theo- 
retical depreciation will seldom be the same at any time during 
the useful life of the asset. At the termination of useful life, 



118 COST FINDING FOR ENGINEERS 

however, the two must be in agreement to account properly 
for complete depreciation of the asset on the books. 

9. Obsolescence. 

Obsolescence is a functional form of depreciation. The 
useful life of a tangible fixed asset comes to a premature end 
due to some external cause, and not because it is worn out or 
physically dead. It is most difficult to anticipate obsolescence, 
as a general rule. Usually it descends upon the asset like a 
thunderbolt. The scope of obsolescence is well illustrated 
by the following statement: " Depreciation from obsoles- 
cence and inadequacy may be actual, probable, possible, 
or improbable .' n 

The engineer again finds that his services are requisitioned 
in passing judgment as to whether an asset is or is not obsolete. 
It is he who says whether the asset in use is superseded by 
another capable of greater production; whether a greater 
investment is warranted. 

Obsolescence should not be charged off as an operating 
expense unless it has actually taken place, or there is some 
definite assurance that it will take place. Many concerns 
provide for obsolescence as an operating expense by making 
the annual depreciation rate higher than the amount estimated 
to take care of the physical depreciation. This point is 
clearly elucidated by the 1934 Act, Federal income tax law, 
which reads as follows : 

With respect to physical property the whole or any portion of which 
is clearly shown by the taxpayer as being affected by economic condi- 
tions that will result in its being abandoned at a future date prior to 
the end of its normal useful life, so that depreciation deductions 
alone are insufficient to return the cost ... at the end of its eco- 
nomic term of usefulness, a reasonable deduction for obsolescence, in 
addition to depreciation, may be allowed . . . No deduction for 
obsolescence will be permitted merely because, in the opinion of a 
taxpayer, the property may become obsolete at some later date. 2 

Anticipated obsolescence may be provided for in a corporation 
by creating a surplus reserve (see Chap. IX, Sec. 5). The 
occurrence of obsolescence not anticipated, and for which no 

1 SALIERS, E. A., "Depreciation Principles and Application," p. 22. 

2 U. S. Income Tax Regulations, 86, Art. 23. 



ACCOUNTING FOR DEPRECIATION AND DEPLETION 119 



reserve has been created, may be accounted for by one of the 
following plans: 

a. Charging the undepreciated balance of the obsolete 
asset to surplus (in a corporation), or against capital. 

6. Capitalizing the undepreciated balance to be amortized 
along with the depreciation of the new asset. 

The former is probably the sounder plan from a conservative 
accounting point of view. The latter may be sanctioned by 
arguing that increased depreciation expense will be offset by 
greater utility embodied in the new asset, resulting in increased 
income. In any case a nice problem arises, which requires 
engineering experience, foresight, knowledge of accounting 
theory, and good common sense to prescribe the proper 
entries on the books. 

10. Recording Depreciation. 

Depreciation of tangible fixed assets has been described 
as an operating expense, which, at the close of each accounting 
period, is another adjustment to consider. 

Illustration. A delivery truck costing $1,036, purchased 
at Jan. 2, 19 , is estimated to have a useful life of 4 years. 
The annual rate of depreciation to be charged off would be 
25 per cent. The adjusting entry to record the depreciation 
at the close of the first year would be as follows : 

General Journal 



19 
















Dec. 


31 


Depreciation on Delivery Equipment 




$259 


00 










Reserve for Depreciation on Machinery 








$259 


00 






To charge operations with depreci- 
















ation applicable to the year 19 * 
















\ 













After posting the ad justing entries, the ledger accounts would 
appear as follows: 

Depreciation on Delivery Equipment 



19 
Dec. 


31 






$259 


00 















120 COST FINDING FOR ENGINEERS 

Reserve for Depreciation on Delivery Equipment 















19 
Dec. 


31 






$259 


00 



The debit of $259 in the Depreciation account represents 
a 25 per cent portion of the cost of the truck chargeable as 
expense for the first year the truck has been in use. Deprecia- 
tion appears as an expense in the income, profit and loss state- 
ment. The debit of $259 in the Depreciation account is closed 
to the Profit and Loss account at the close of the accounting 
period (see Chap. XI). If depreciation was not considered, 
expenses would be understated and profits overstated. In 
crediting the Reserve for Depreciation on Delivery Equipment 
account, the asset values are prevented from being overstated 
on the books. 

For each different class or group of tangible fixed assets, as 
for example, machinery, there is need for only one asset 
account, a single depreciation reserve account, and only one 
depreciation expense account regardless of the number of 
different individual units which are being accounted for. 
Where there are many different units of equipment to be 
accounted for, a separate subsidiary record is provided for 
each unit, which in the aggregate comprises the equipment 
ledger. For each unit, there is a record of the details pertain- 
ing to the original cost, the monthly and annual depreciation 
charges, and the accumulated depreciation to date. See 
Chap. XXI for an illustration of an equipment ledger sheet. 

11. The Depreciation Reserve Account. 

The Depreciation Reserve account remains an open account 
in the ledger until the asset is scrapped or disposed of through 
sale or exchange. At the close of each fiscal period, an 
additional credit is placed in the account until the cost of the 
asset is entirely depreciated. At the beginning of the fourth 
year the Reserve account in the preceding illustration would 
appear as shown at the top of page 121. 

The balance in the reserve account, at the close of any 
accounting period, is shown in the balance sheet. The 
account balance represents the accumulated theoretical 



ACCOUNTING FOR DEPRECIATION AND DEPLETION 121 
Reserve for Depreciation on Delivery Equipment 















19 
























Dec. 


31 






$259 


00 














19 
























Dec. 


31 






259 


00 














19 
























Dec. 


31 






259 


00 



depreciation. The difference between the asset cost and the 
balance in the reserve account represents the net book value 
of the asset. The purpose of the reserve account is to carry 
the credits, representing depreciation charged off, rather than 
crediting the asset account itself for the periodic depreciation. 
From this point of view, depreciation reserve accounts may 
be termed supplementary asset accounts. Such reserve 
accounts are called " valuation reserves/' No credit should 
be posted to the asset account carrying the cost value of 
a tangible fixed asset until the Basset is sold, scrapped, or 
exchanged in part payment for a new unit. In this manner 
the original cost may always be compared with the accumu- 
lated depreciation to show the estimated book value of the 
asset. Only at the time of the disposal of the capital asset 
should the asset account be credited and, then, with the full 
original cost value. 

On the balance sheet, the reserve for depreciation amount 
may appear in one of two ways. The various credit amounts 
in the different depreciation reserve accounts may be grouped 
under the general caption " reserve for depreciation" on the 
liability side, or subtracted from the total fixed assets. Com- 
mon practice also shows the reserve amounts on the asset 
side deducted from the individual assets to which they are 
related (see Chap. X). 

The number of valuation reserve accounts to be found in 
the ledger usually depends upon the variety of fixed tangible 
assets. Separate reserve accounts are usually opened for 
each different class of assets, such as machinery, buildings, 
delivery equipment, furniture and fixtures, etc. Some con- 
cerns, however, make use of only one depreciation reserve 
account, using it as a control account as described in Chaps. 
XIV and XXL 



122 



COST FINDING FOR ENGINEERS 



12. Replacing the Depreciated Asset. 

Accounting for the depreciated asset, which has served its 
useful life, is frequently more involved than accounting for the 
periodic depreciation. Several possibilities will be described. 

Illustration. A machine costing $850 on Jan. 2, 19 , is 
estimated to have a useful life of 8 years, and a scrap value of 
$50. The annual depreciation rate is, then, 12^ per cent, or 
$100 per annum. 

a. Useful Life Terminates in Accordance with the Preestimation. 
The accounts at the end of 8 years would appear as follows : 

Machinery 



19 
Jan. 


2 






$850 


00 















Reserve for Depreciation on Machinery 















19 
























Dec. 


31 






$100 


00 














19 
























Dec. 


31 






100 


00 














19 
























Dec. 


31 






100 


00 














19 
























Dec. 


31 






100 


00 














19 
























Dec. 


31 






100 


00 














19 
























Dec. 


31 






100 


00 














19 






<! 


















Dec. 


31 






100 


00 














19 
























Dec. 


31 






100 


00 


/ 

























The entries made at the time of the sale, 8 years after the 
purchase was made, are as follows : 

Cash Receipts Journal 



19 
Jan. 


2 


Machinery 




\/ 






$50 


00 



ACCOUNTING FOR DEPRECIATION AND DEPLETION 123 

General Journal 



19 
















Jan. 


2 


Cash 


v/ 


$ 50 


00 










Reserve for Depreciation on Machinery 




800 


00 










Machinery 








$850 


00 






To record the disposal of machin- 
















ery purchased Jan. 2, 19 , which 
















has been entirely depreciated and 
















which brought $50 scrap value. 













In actual practice, the entry is usually not so simple. 
Other illustrations will verify this statement. 

6. Useful Life Terminates before Asset Has Been Entirely 
Depreciated. 

(1) A loss incurred in disposal of the asset. 
At the end of 6 years the asset is disposed of for $100 cash. 
The entry would be as follows : 

General Journal 



19 
Jan. 



Cash V $10000 

Reserve for Depreciation on Machinery 600 00 

Loss on Sale of Assets (Capital) 150 00 

Machinery $850 00 

To record the disposal of a ma- 
chine purchased Jan. 2, 19 , real- 
izing $100, cash and taking a loss on 
the undepreciated value* 



Theoretically, the loss of $150 should be charged against 
the Capital account of the owner, or the Surplus account 
in a corporation. The asset has lasted 6 years instead of 8 
years; $100 scrap value instead of $50 was received. The 
correct rate then to apply in each of the 6 years the asset 
was depreciated, therefore, should have been 16% instead 
of 12)^ per cent per annum. In charging off depreciation at 
the rate of 12)4 per cent per annum, in view of the final dis- 
position of the asset, the expense in each of the 6 years has 
been understated $25. This means that in 6 years the profits 
have been overstated by a total of $150. This misstatement 



124 



COST FINDING FOR ENGINEERS 



of profits is reflected in the present Capital account; hence, 
the necessity for the adjustment of the Ownership account. 
In practice, a Loss on Capital Asset account is debited rather 
than the Ownership account, taking up the entire loss in the 
year in which it is actually realized. This procedure is required 
in order to have a record of any profit or loss for Federal 
income tax purposes that is classified as taxable income or 
an allowable deduction. If the Ownership account or Capital 
is debited with the loss, then it implies that an adjustment of 
profits for prior years is being made. If this is done, it 
invalidates the tax returns submitted for the preceding years. 

(2) A profit realized in disposal of the asset. 

At the end of 7 years the asset is sold for $200. The entry 
to record the transaction would be as follows : 

General Journal 



Jan. 2 Cash v/ $20000 

Reserve for Depreciation on Machinery 700 00 

Machinery $850 00 

Gain on Sale of Capital Assets (Capi- 
tal) 5000 

To record the disposal of machine 
purchased Jan. 2, 19 , realizing 
$200 cash. 



c. Asset Still in Use after It Has Been Fully Depreciated on 
the Books. 

Under such circumstances no effort is made to adjust the 
asset afid reserve account, unless the original depreciation 
rate is found to have been grossly erroneous. Sometimes an 
appraisal of the asset by the engineer will disclose that the 
asset still has quite an extended future life. Theoretically, 
the correcting entry to reflect the newly appraised value 
would be as shown on page 125. 

In practice, the balances in the asset and its valuation reserve 
accounts would remain unchanged. This is the practice in 
order to be in keeping with Federal income tax provisions. 
Adjusting capital for inaccurate depreciation charges in past 
periods results in adjusting profits of prior periods. This 
procedure requires the preparation of amended tax returns. 



ACCOUNTING FOR DEPRECIATION AND DEPLETION 125 



Unless the amount involved represents a sizable one, an 
amended return is dispensed with and adjustment is made 
when disposal is made of the asset. 

General Journal 



Reserve for Depreciation on Machinery $50000 

Owner's Capital $500 00 

To adjust capital for misstated 
profits resulting from too high de- 
preciation charges in the years 19 , 
etc. 



13. Appreciation. 

Appreciation is exactly opposite in meaning to depreciation. 
Appreciation is the increase in the value of an asset due to 
chemical or aging processes and economic conditions. A 
sharp distinction must be drawn between appreciation arising 
from external conditions and that resulting from internal 
conditions. 

Appreciation arising from factors without the operations of 
the business is economic appreciation. The increase in land 
values or other real property due to the increase in the income- 
yielding capacity, is termed in economics, the unearned incre- 
ment. A valuation problem naturally arises, which must be 
solved by the engineer. The valuation principles from an 
accounting point of view are considered in Chap. XIV. 
Suffice it to say at this point, that the amount of appreciation 
of property values does not constitute an earned profit Unless 
the asset affected is sold. 

Appreciation may arise from factors entirely within the 
business. Such appreciation must be accounted for as part of 
the operations. Appreciation is associated with inventory 
values. It is found to exist primarily in plants where the 
time element is necessary to produce the desired product. 
The conversion of raw materials into a finished product 
is not only a mechanical one, but may be a chemical one as well. 
Green timber must be kiln dried before it is useful in manufac- 
turing. Cheese, vinegar, ginger ale, and other foodstuffs must 
experience a process of aging before they are turned out as 



126 COST FINDING FOR ENGINEERS 

finished goods. Tobacco must be seasoned to give it the pecu- 
liar flavor it must possess before being marketed. The eco- 
nomic principle of time utility during the process of production 
thus tends to increase the value of the goods. No specific 
accounting entries are necessary to record this change. The 
transformation is an inventory problem reflected in the raw 
material, goods in process, and finished goods inventories 
described in Chaps. XVIII and XIX. No entry is made for the 
increase in value of the inventories due to chemical changes. 
The profit is reflected in the difference between the selling 
price and the cost of sales. 

14. Depletion. 

Depletion is the consumption of a fixed asset which cannot 
be replaced. Depletion takes place when a fixed asset 
value is converted into an inventory or a current asset value. 
Only certain types of assets are subject to depletion. In 
general the extractive industries are the only ones possessing 
assets subject to depletion. Coal, oil, gas, timber, quarries 
and ore are examples of fixed assets which are subject to 
depletion. 

^ The capital investment in the deposit is considered as a 
fixed asset as long as the deposit remains unused. The engi- 
neer surveys the property and makes an estimate of the number 
of productive units contained in the deposit. This estimate is 
of tremendous importance because it forms the basis for the 
depletion charge on the books of account. 

The following conditions illustrate the handling of deple- 
tion: The Black Diamond Coal Company was organized as a 
corporation to purchase 1,000 acres of coal land at $140 an acre. 
Two thousand shares of common capital stock were authorized 
to be issued at a par value of $100 a share. Capital stock in 
the amount of 1,400 shares was given in exchange for the land, 
and 600 shares were sold at par for cash. A tipple was built at 
a cost of $10,000; a hoisting shed cost $5,000; hoisting machin- 
ery $6,000; cutting machines $11,000; mine cars and track 
$4,000; electrical equipment $6,000; development expenses 
$8,000. A value of $40 an acre was placed on the surface land. 
Engineers estimated that the deposit held 250 tons to the acre. 
The entries to record the above transactions would be as 
follows: 



ACCOUNTING FOR DEPRECIATION AND DEPLETION 127 



General Journal 



19 
Dec, 



Unissued Common Capital Stock 
Common Capital Stock 

To record the authorized capi- 
tal stock granted by charter dated 
Dec. 1, 19 , issued by the Secre- 
tary of the Commonwealth of 
Pennsylvania* 
Surface Land 
Coal Deposit 

Unissued Common Capital Stock 

To record issue of 1,400 shares 
capital stock for 1,000 acres land 
at above value. 



$200,000 



40,000 
100,000 



$200,000 



140,000 



Cash Receipts Journal 



19 
Dec. 



10 



Unissued Common Capital Stock 
Cash (Dr.) 

To record issue of 600 shares 
capital stock at par value. 



Cash Disbursements Journal 



$ 60,000 



$ 60,000 



19 












j 


Dec. 


15 


Tipple 






$ 10,000 








Hoisting Shed 






6,000 








Hoisting Machinery 


To record purchase price 




6,000 








Cutting Machine and Mine 


and cost of assets and 












Cars 


development prepara- 




11,000 








Electrical Equipment 


tory to coal removal. 




6,000 








Development Expenses 






8,000 








Mine Cars and Track 






4,000 








Cash (Cr.) 








$ 50,000 













A balance sheet prepared before operations began is as 
shown at the top of page 128. 

The depletion charge per unit is computed by dividing cost 
of the deposit by the total estimated units contained in the 
deposit. In the illustration, the total estimated deposit 
is 250,000 tons; the cost $100,000; and the depletion cost per 
ton, 40 cents. By keeping a daily production record, the 
annual depletion charge is computed. If 50,000 tons were 



128 



COST FINDING FOR ENGINEERS 



FORM 30 

BLACK DIAMOND COAL Co. 

BALANCE SHEET 

Jan. 1, 19 



Assets 



Liabilities and Ownership 



Current: 
Cash $ 10,000 

Fixed: 

Tipple $ 10,000 

Hoisting shed 5 , 000 

Hoisting machine.. 6,000 

Cutting machine. . . 11, 000 

Mine cars 4,000 

Surf ace land 40,000 

Coal deposits 100 , 000 

Electrical equip- 
ment 6,000 

Deferred Charge: 



Development expenses. 



182,000 
8,000 



$200,000 



Ownership: 

Common capital stock author- 
ized and outstanding, 2,000 
shares at $100 par value $200,000 



$200,000 



mined the first year, the depletion charge would be $20,000, and 
would be recorded by the following entry : 

. General Journal 



19 
Dec. 



31 Depletion, Coal Deposit $20,00000 

Reserve for Depletion of Coal 

Deposit $20,00000 

To record the charge for de- 
pletion for the year ended Dec. 
31, 19. 



The Reserve for Depletion account is a valuation reserve 
account. It is an account supplementary to the asset account, 
Coal Deposit. The difference between the balances in the 
asset account and its valuation reserve account at any time 
gives the estimated value of the unremoved deposit. On 
the balance sheet the balance of the reserve account is deducted 
from the asset account to which it applies. 

It is necessary to consider depletion in order to safeguard 
the invested capital in the asset subject to exhaustion. Deple- 
tion is an expense; a cost of production. It is comparable 
to the cost of merchandise purchased for resale, or to the cost 
of goods manufactured for sale. 



ACCOUNTING FOR DEPRECIATION AND DEPLETION 129 



As previously stated, the net profits of a corporation are 
transferred from the Profit and Loss account to the Surplus 
account. The entry for the transaction is as follows : 

General Journal 



19 












Dec. 


31 


Profit and Loss 




$20,000 








Surplus 






$20,000 






To transfer the net profit to the Sur- 












plus account. 









When the board of directors of a corporation pass a resolution 
to declare a dividend from earnings, the entry is as follows: 

General Journal 



19 












Dec. 


31 


Surplus 




$12,000 








Dividends Payable 






$12,000 






To set up the liability for the pay- 












ment of a 6% dividend from the earn- 












ings (surplus) on the outstanding 












capital stock. 









The subsequent payment of the dividend, after its declaration, 
is as follows: 

Cash Disbursements Journal 



19 
Jan. 



30 



$12,000 



$12,000 



Dividends Payable 
Cash (Cr.) 

To record the payment of the divi- 
dend declared 30 days previously. 



Provision must be made to return the $200,000 capital 
invested by the stockholders at the end of 5 years, assuming 
that the coal deposit is entirely exhausted at that time and no 
new field is to be exploited by the corporation. If depletion is 
not considered in the cost of sales, obviously, gross profits 
and net profit would be overstated with a resultant overstate- 



130 COST FINDING FOR ENGINEERS 

ment of capital or surplus. In such cases, the overstated 
profits might have been entirely distributed as dividends from 
"earnings/' Thus, it would prevent the return of the original 
investment as such. 

Production on the same basis in the 4 subsequent years 
would entirely deplete the coal deposit according to the 
original estimate. The relationship existing between deprecia- 
tion and depletion may be seen in this connection. The 
fixed assets required to mine and remove the coal are subject 
to depreciation. The estimated life of the deprecative assets 
must be in accordance with the estimated time necessary to 
exhaust the coal deposit. The possibility of removal of the 
assets subject to depreciation to another location for use, of 
course, enters into consideration in fixing the per annum 
rate. 

Questions 

1. What is meant by "depreciation?" 

2. What are the chief causes bringing about depreciation? 

3. What is the necessity for considering depreciation? 

4. Why is depreciation called a "fixed charge?" 

5. What factors must be known in order to compute the periodic 
depreciation rate? 

6. What is included in the original cost of a tangible fixed asset? 

7. What different factors may cause the estimated useful life of fixed 
assets to vary? 

8. What is meant by "scrap value" and of what significance is it? 

9. Name some of the most common methods of computing deprecia- 
tion. 

10. Cpntrast theoretical and actual depreciation. 

11. What is meant by the term "obsolescence?" 

12. How may obsolescence be accounted for, if no provision has been 
made for same, yet it has become an actuality? 

13. What adjustment is necessary in the work sheet to record deprecia- 
tion? 

14. What adjusting journal entry is made for depreciation? 

15. Explain the purpose of the depreciation reserve account. 

16. How is the reserve for depreciation shown in the balance sheet? 

17. In case a fixed asset is disposed of before its cost is entirely depre- 
ciated, what are some of the problems of adjustment which may arise? 

18. What is meant by appreciation? 

19. Differentiate between the two different types of appreciation. 

20. Define depletion. 

21. Why is it necessary to consider depletion? 

22. How are depletion charges computed? 



CHAPTER IX 

RESERVES AND FUNDS 

1. The Meaning of Reserves. 

The meaning of " reserve'' is to keep back for the present 
time something for use in the future. The reserve for depre- 
ciation accounts, described in Chap. VIII, fulfils this defini- 
tion. The credit in the depreciation reserve account withholds 
separately the accumulated depreciation amount applicable 
to the tangible fixed asset, instead of crediting the asset 
account itself. From the time the first credit is set up 
in such a reserve account until some disposal in made of the 
asset, it serves as a valuation account. Comparison of the 
cost value as a debit in the asset account with the accumulated 
depreciation as a credit in the reserve account gives the pres- 
ent estimated book value of the asset item. 

Reserve account balances always represent estimates or 
book values. The idea of money is frequently associated 
with the reserve in the minds of those who are not familiar 
with accounting principles. A minute's thought regarding the 
nature of the balance found in the Cash account and in the 
reserve accounts, however, will dispel any idea of similarity. 
The Cash account is an asset appearing with a debit balance, 
while reserve accounts have, normally, only credit balances and 
there is no relation between the two. 

2. Classification of Reserve Accounts. 

Reserve accounts may be classfied as valuation, operating, 
capital, and appraisal reserves. This fourfold classification 
of reserves is a general one. All four general groups may be 
still further subdivided. A more detailed outline is shown as 
follows : 

A. Valuation Reserves. 

1. Depreciation. 

2. Depletion. 

3. Uncollectible Accounts. 

131 



132 COST FINDING FOR ENGINEERS 

B. Operating Reserves. 

1. Maintenance. 

a. Repairs, 
fe. Breakage. 

c. Reconditioning. 

2. Inventory Losses. 

3. Liability. 

a. Taxes. 

6. Water and Power. 

t. Compensation Insurance. 

d. Federal Income Tax. 

C. Capital or Surplus Reserves. 

1. Plant Extension and Betterments. 

2. Contingencies. 

3. Funds. 

D. Appraisal Reserves. 

3. Valuation Reserves. 

A. DEPRECIATION AND DEPLETION RESERVES. 

The necessity for depreciation and depletion reserve accounts 
was considered in Chap. VIII. Periodic depreciation and 
depletion charges to operations are offset by credits to the 
proper reserve accounts. Instead of crediting the asset 
account with the estimated depreciation or depletion, the 
reserve account is used to record this credit. 

B. RESERVE FOR UNCOLLECTIBLE ACCOUNTS. 

* 
Another valuation reserve account to be found in the ledger 

of many concerns doing business on a credit basis is the 
Reserve for Uncollectible Accounts. One of the unwritten 
laws of business is that a certain loss from uncollectible 
accounts must be expected when sales are made on account. 
A corollary is that the longer a customer's account remains 
unpaid, the less the likelihood of ever collecting it. This 
is quite often one reason why cash discounts are offered for 
prompt payment. 

A certain percentage of total sales or credit sales for any 
accounting period, or the amount of outstanding accounts 
receivable at the close of any accounting period may be used 
as the basis for estimating the amount of uncollectible cus- 
tomers' accounts. Past experience will be the index for esti- 
mating what percentage of credit sales made during any one 
accounting period will never be paid in full. The credit 



RESERVES AND FUNDS 



133 



policy of the concern is a factor to be considered when esti- 
mating the amount of doubtful accounts to charge off period- 
ically. A stringent credit policy, where financial ratings 
are carefully studied before credit is allowed, will mean, 
normally, a low percentage of losses from uncollectible 
accounts. 

When the amount of the doubtful accounts has been 
estimated at the close of an accounting period, an adjusting 
entry is made as follows : 

General Journal 



Dec. 


31 


Doubtful Accounts 
Reserve for Uncollectible Accounts 
To charge operations for the 
year ended Dec. 31, 19 , with- 
one-half of 1 % of net sales for 
estimated uncollectible accounts. 




$1,230 


88 


$1,230 


88 



The amount of doubtful accounts is shown in the income, 
profit and loss statement as an expense item. The reserve for 
uncollectible accounts appears on the balance sheet as a 
deduction from the accounts receivable. This reserve 
account is a valuation account and is a supplementary offset 
to the asset, accounts receivable. The reserve is used to 
reduce the book value of accounts receivable down to 
their estimated collectible value in the light of past 
experience. 

Why should the amount of doubtful accounts, as an adjust- 
ment at the close of an accounting period, be considered as 
an expense of the period when the actual worthless accounts will 
not be known until subsequent periods? When the account- 
ing system is operated on the accrual basis, all sales, 
both cash and credit, are considered as an income of the 
period in which they are made. It is logical, then, to antic- 
ipate any losses from uncollectible customers' accounts as 
an expense for the same period in which the sale is considered 
as income. 

In the following period, when it is definitely known that 
certain accounts are uncollectible, the following entry should 
be made: 



134 COST FINDING FOR ENGINEERS 

General Journal 



19 



Reserve for Uncollectible accounts 
John E. Marvin (Account Receivable) 

To charge off uncollectible account of 
above customer* 



$78 



90 



$78 



90 



The account, Reserve for Uncollectible Accounts, absorbs the 
amount of the customer's account which has proved to be 
uncollectible. The loss from the worthless account is not con- 
sidered an expense in the year it is ascertained to be uncollecti- 
ble, because such losses were anticipated and provisions made 
for same by making the adjusting entry at the close of the pre- 
ceding accounting period. 

The provision for losses on uncollectible customers' accounts 
being an estimate, the amount rarely coincides with the actual 
loss from such a source. The following accounting period 
usually closes with either a debit or a credit balance in the 
Reserve account at the end of the fiscal year. The balance 
generally means that either an underestimate or overestimate of 
expense was made at the close of the preceding period, causing 
a misstatement of the net profit or net loss and a resultant 
misstatement of ownership. Theoretically, the balance in 
the account at the close of the accounting period should be 
closed out as an adjustment of the owner's Capital account. 
In practice, the balance is not so adjusted. Such procedure, 
while theoretically sound, runs counter to Federal income 
tax procedure, since an adjustment of the ownership account 
is equivalent to a revision of net profit or net loss for a 
preceding year. For small adjustments such a revision is 
not made. Actually, the account, Reserve for Uncollectible 
Accounts, remains open and a new credit posting finds its way 
into the account as a result of the adjusting entry made at 
the close of the following fiscal period. 

4. Operating Reserves. 

Operating reserves, like valuation reserves, are created as a 
result of certain charges being necessarily made to account 
for the proper expenses of the period. Operating reserves 



RESERVES AND FUNDS 135 

differ, however, in respect to the reason for which they are 
created. Operating reserve accounts accumulate the credits 
resulting when monthly charges are made to the cost of 
production for estimated maintenance, inventory losses and 
other estimated expense items. 

A. MAINTENANCE RESERVES. 

1. Reserve for Repairs. The equipment in many industries 
is subject to heavy use during part of the year, and to relatively 
light use the remainder of the year. When heavy demand is 
made on the equipment, little time is available for any but 
emergency repairs. During the off-season production, the 
necessary neglected repairs are made. 

The ice industry furnishes a good example of this problem. 
During the summer months, the trucks and wagons, as well as 
the machinery, are in use 16 to 24 hours a day, while the 
equipment is relatively idle during the winter. 

Obviously, under these circumstances, the months showing 
the smallest income would receive the heaviest expenses for 
repairs and vice versa. Providing a Reserve for Repairs 
account eliminates the heavy blow of repair charges during dull 
times and spreads it uniformly over the whole year. The cost 
of the annual repairs is estimated at the beginning of the 
accounting period. Each month one-twelfth of the per annum 
estimated cost is charged as an operating expense and a like 
amount credited to the Reserve for Repairs account. The 
adjusting entry is as follows: 

General Journal 



19 
















Jan. 


31 


Repairs to Wagons 




$66 


91 










Reserve for Wagon Repairs 








$66 


91 






To charge operations with one-twelfth 
















of the estimated cost of wagon repairs 
















for the year 19 . 













As the repairs are made during the year, the actual costs 
are charged against the Reserve account. The following 
entry illustrates the accounting procedure : 



136 



COST FINDING FOR ENGINEERS 
General Journal 



19 
Nov. 



23 



Reserve for Wagon Repairs 

Hoke Lumber Company (Account Pay- 
able) 

To record cost of lumber used in 
repairing wagons. 



$147 



21 



$147 



21 



2. Reserves for Breakage and Reconditioning. Reserve 
accounts for these two items are identical in so far as the 
accounting procedure is concerned. While the accounts 
are also similar to the Repairs Reserve account, they are 
found in the books of industries of another type. 

In the glass industry, particularly, is to be found the Reserve 
for Breakage account. Large clay melting pots are used in 
production of certain kinds of glassware. A pot may be 
broken during the first heat; others may last for months. 
To equalize the cost from month to month, a uniform charge is 
instituted monthly. The entry to record this monthly 
charge would be as follows: 

General Journal 



19 
Feb. 



28 



Melting Pot Breakage 
Reserve for Pot Breakage 

To set up monthly estimate of the 
cost of pot breakage. 



$298 



55 



$298 



55 



As the pots are purchased to replace the ones broken 
in the process of production, the cost is charged against the 
reserve account which has been created by the above entry. 

A similar condition is met in connection with the same type 
of reserve accounts in the open-hearth industry. Period- 
ically the furnace must be relined. The cost of relining is 
not considered as a replacement of an asset, as is the case 
when an automobile or other fixed asset has been fully depre- 
ciated and is to be replaced. The cost of relining the open- 
hearth furnace is considered a cost of reconditioning in 
addition to the depreciation cost which is also present. 
Depreciation must also be taken into consideration on the 
open hearth as a complete unit. The Reserve for Relining 



RESERVES AND FUNDS 



137 



account accumulates a balance, as a result of monthly credits 
being posted to it, which are based upon the tonnage of steel 
produced. Against this balance is charged the cost of relining 
the furnace when its condition warrants the overhauling. 

It is thus revealed that maintenance reserves are quite 
different from valuation reserves. Maintenance reserves 
are created in an effort to equalize monthly operating costs. 
They are not supplementary to any fixed asset accounts 
as are the depreciation, depletion, and doubtful account 
reserves. 

If the actual expenses prove to be greater or less than the 
anticipated amount set up in the reserve accounts, the 
difference is closed into the Profit and Loss account at the end 
of the accounting period. 

B. INVENTORY RESERVES. 

In setting up a Reserve for Inventory Losses account, 
the same purpose is achieved as is done by setting up mainte- 
nance reserve accounts. It is a well-known fact that the 
shortage and wastage take place in materials and supplies 
regardless of the safeguards planned to prevent them. Where a 
physical inventory is taken annually, the loss can be adjusted 
only through the Profit and Loss account at that time. As 
materials are usually purchased in bulk lots, but distributed to 
operations in small amounts, considerable quantities are 
lost through the measuring and weighing out, etc., of supplies 
charged into production. Since the shortage is a daily 
problem, it should be reflected in the monthly statements 
as an operating expense. To do so an entry is made monthly 
as follows: 

General Journal 



19 
















May 


31 


Inventory Shortage 




$83 


33 










Reserve for Inventory Shortage 








$83 


33 






To charge operations with estimated 
















loss for the month. 













When the physical inventory is taken, the shortage is 
ascertained by comparing the book figures with the actual 



138 



COST FINDING FOR ENGINEERS 



value resulting from the physical count as shown in the 
following entry: 

General Journal 



19 
Dec. 



31 Reserve for Inventory Shortage $987 65 

Inventory $987 65 

To charge the actual inventory 
shortage against the reserve account 
created for this purpose. 



Any excess amount remaining in the Reserve for Inventory 
Shortage account after the above entry has been posted is 
closed to the Profit and Loss account. If the Reserve account 
balance is insufficient to absorb the figure representing the 
loss, the difference must be charged directly to the Profit 
and Loss account as unabsorbed inventory expense. 

C. LIABILITY RESERVES. 

Liability reserve accounts, as the third group of operat- 
ing reserves, are similar to the maintenance and inventory 
reserves in that they attempt to charge operations with exist- 
ing expenses the amount of which is unknown or uncertain. 
Liability reserve accounts differ from the other operating 
reserves in that they arise in connection with pure expense 
accounts instead of fixed assets and inventories. 

1. Reserve for Taxes. Some state and local taxes are 
levied on the basis of the volume of sales made during the 
year. The tax is payable in the subsequent year. To charge 
operations with the cost applicable to the present year, an 
adjusting entry is made at the close of each accounting period 
as follows : 

General Journal 



19 
July 



31 



Taxes 

Reserve for Taxes 

To charge operations with the esti- 
mated cost of taxes applicable to July, 
19 



$67 



67 



$67 



67 



RESERVES AND FUNDS 



139 



2. Reserve for Water and Power. These reserve accounts 
are almost identical in nature with the Tax Reserve account. 
The only difference lies in the name in which the liability 
for payment is ascertained. The basis for the estimated charge 
will be the meter reading made and compared with the previous 
one made by the water or power companies, 

3. Reserve for Compensation Insurance. Insurance com- 
panies, writing employees' compensation insurance policies, 
bill the insured at the beginning of the calendar year for an 
arbitrary amount, always less than the total amount to be 
collected for the year. The total cost is based upon a per- 
centage of each $100 of payroll for each different occupation. 
The hazard and the death or injury rate experience of the pre- 
ceding years for the various occupations determine the rates. 
Thus, the rates may change from year to year. The additional 
actual cost of this insurance becomes known only after the 
insurance company auditor has reviewed the Payroll and 
Wage accounts on the books of the insured company. This 
procedure takes place in the year following the close of the 
preceding accounting period. 

Obviously, it becomes necessary to estimate this insurance 
cost in order to charge the period with the proper expense. 
The estimate may be made by applying the rates for the 
preceding year to the payroll for each month. The entry to 
reflect the compensation insurance charge for each month 
is as follows: 

General Journal 



19 
Aug. 



31 Compensation Insurance $4989 

Reserve for Compensation Insurance $49 89 

To charge operations with the esti- 
mated cost for compensation insurance 
for the month of August. 



When the final bill is rendered in the following year for the 
balance of the premium after the payroll audit has been made, 
the entry made is as follows: 



140 



COST FINDING FOR ENGINEERS 

General Journal 



19 
Apr. 



Reserve for Compensation Insurance $531 79 

Miners and Puddlers Insurance Com- 
pany (Account Payable) $531 79 

To charge the cost of compensa- 
tion insurance for the past year 
(19 ) against the Reserve account 
set up for this purpose. 



Inasmuch as the actual cost from this source is not known 
until some months after the net profit or net loss for the 
preceding period has been determined, theoretically any 
difference from the estimated cost set up in the Reserve 
account should be adjusted against the Capital or Surplus 
accounts. To be in harmony with Federal income tax prac- 
tice, however, any excess amount in the reserve account is al- 
lowed to become applicable to the present period. If the actual 
cost is greater than the estimated amount, already charged 
to production and reflected in the reserve account, the 
difference is considered an additional expense in the period 
in which it becomes known. 

4. Reserve for Federal Income Tax. The nature of this 
reserve is described on page 144. 

5. Capital Reserve. 

Capital or surplus reserves are invariably found on the 
books of a business organized as a corporation. Ownership is 
reflected in two accounts on the books of a corporation. The 
ownership accounts are: 

a. Capital Stock, representing ownership investment, and 

b. Surplus, representing accumulated or undistributed profits. 
Ownership in a corporation is represented by capital stock 

certificates showing the number of shares owned by each 
stockholder. Unlike the sole proprietorship and partnership 
type of business organization, the profits made in the corpora- 
tion cannot be distributed to the stockholders until the board 
of directors so declares. The distribution of the profits is 
made in the form of a dividend, the rate of which is mentioned 
in par value capital stock certificates. Until the dividend is 
declared the profits repose in the Surplus account. The 



RESERVES AND FUNDS 



141 



entry for transferring the net profit to Surplus account is 
as follows: 

General Journal 



19 
Dec. 



31 



Profit and Loss 
Surplus 

To transfer the net profit of the 
period to surplus. 



$6,493 



56 



$6,493 



56 



To record the declaration and payment of a cash dividend 
the entries would be as followes: 



General Journal 



19 
Dec. 



31 



Surplus 

Dividends Payable 

To set up the liability for pay- 
ment of the regular 6 % dividend 
for the year ended Dec. 31, 19 , 
as contained in the minutes of the 
board of directors, dated Dec. 20, 



Cash Disbursements Journal 



$3,600 



00 



$3,600 



00 



19 


















Jan. 


16 


Dividends Pay- 


Payment of divi- 
















able 


dends declared 




$3,600 


00 










Cash (Cr.) 


Dec. 20, 19. 








$3,600 


00 



It is not considered conservative accounting practice for 
the Surplus account to be reduced to low tide through the 
declaration of dividends. Frequently a portion of the earned 
surplus is reserved for some specific purpose. To provide 
for certain expenditures and probable losses which are not 
proper charges to current operations, surplus reserves are 
provided. Earned surplus reserves are shown in the classi- 
fication at the beginning of this chapter. Each group will 
be described in detail in the following sections. 



142 



COST FINDING FOR ENGINEERS 



A. PLANT EXTENSION AND BETTERMENT RESERVES. 

Improvements, betterments and additions to plant and 
equipment may be financed from accumulated profits in a 
corporation instead of bringing in new capital. If this is the 
policy of the board of directors, surplus must be reserved to 
provide for the purpose. Instead of paying ordinary or 
extra dividends from surplus, the earned profit is used to 
expand the plant or provide for more economical production. 
The present use of profits for expansion or improvements may 
be the cause for making increased profits in the future. 

In order that the earned surplus will not be considered 
free and available for the purpose of declaring dividends, 
a surplus reserve is created by the following entry: 

General Journal 



19 
Dec. 



31 Surplus $25,00000 

Reserve for Plant Betterments $25,00000 

To provide for the financing 
of machinery rearrangements, 
additional equipment and con- 
struction as set forth in a reso- 
lution contained in the minutes 
of the board of directors dated 
Dec. 27, 19 



As the betterments are made, the cost is charged to the 
asset accounts affected, because new equipment and construc- 
tion have required outlays of cash. That is, a current asset 
has been displaced by a fixed asset in the amount of the cost 
of the betterments. After the betterments have been made, 
the purpose for which the Reserve for Plant Betterments 
account was created has been accomplished. After this has 
been done, there is no further need for the reserve account. 
The surplus so appropriated should be returned to the free 
earned surplus by merely reversing the last entry. 

B. CONTINGENCY RESERVES. 

Irregular and indefinite losses, which cannot properly be 
considered as operating expenses, may be provided for by 
setting up surplus reserves. Such losses may arise from fire, 
flood, strikes, litigation, obsolescence, expected future declines 



RESERVES AND FUNDS 



143 



in inventory values, etc. The creation of the reserve is 
the same as in the preceding illustration. Likewise the 
specific reserve is returned to surplus after the purpose for 
which it has been created has been accomplished. 

C. FUND RESERVES. 

The necessity for the establishment of specific funds 
frequently arises in a corporation. Fund reserves are often 
coexistent with the special funds. The necessity for special 
fund reserves is to insure the reservation of a sufficient amount 
of surplus to make sure that the special funds may be set 
aside from the general cash. Some special fund reserves 
are: 

1. Sinking fund reserve. 

2. Redemption fund reserve. 

3. Replacement fund reserve. 

4. Contingency fund reserve. 

The entry to create the reserve is as follows: 

General Journal 



19 




Surplus 
Bond Redemption Fund Reserve 
To provide for setting aside a 
portion of surplus in accordance 
with the provisions of the 6%, 
20-year bond issue of 19 




$2,718 


46 


$2,718 


46 



At the maturity of the bonds 20 years later, the Bond Redemp- 
tion Fund Reserve account has served its usefulness; hence, it 
is returned to surplus by a reversing entry: 

General Journal 



19 




















Bond Redemption Fund Reserve 




$100,000 


00 










Surplus 








$100,000 


00 






To return to free surplus 
















the amount of surplus appro- 
















priated for the specific pur- 
















pose of insuring the estab- 
















lishment of the special 
















redemption fund. 













144 COST FINDING FOR ENGINEERS 

D. FEDERAL INCOME TAX RESERVE. 

The amount of Federal income tax paid annually is based 
upon the taxable net income. This tax, therefore, cannot 
be considered as an expense of the business at any time. This 
tax is a levy against ownership or surplus. In a corporation 
the provision for setting up the liability for payment is made 
by the following entry: 

General Journal 



Dec. 


31 


Surplus 




$2,162 


09 










Reserve for Federal Income Tax 








$2,162 


09 






To set up the liability for tax 
















payment for the year ended Dec. 
















31, 19 













This reserve is more or less mongrel in nature. It is not an 
appropriated surplus reserve because the amount set aside 
will never be returned to surplus. As soon as the above 
entry is made, the Reserve account is considered as a current 
liability. It must be paid during the following year. 

When the income tax is paid the following entry is made. 

Cash Disbursements Journal 



19 


















Mar. 


13 


Reserve for Federal In- 


















come Tax 






$2,162 


09 










Cash (Cr.) 










$2,162 


09 



6. Appraisal Reserves. 

Buildings and plant equipment shown in their ledger 
accounts at cost value, less the balances in the valuation 
reserve accounts, reflect the present estimated book value of 
the respective assets. Certain factors may have arisen 
since the assets were acquired which cause the book value to 
be misstated. Depreciation rates used in the past may have 
been too high or too low. The replacement value of the plant 
equipment may be much higher than the book value shows, 
due to a steady upward trend in the market. Development 
of the community in which the buildings are located may 
have created a higher value applicable to the buildings than 



RESERVES AND FUNDS 



145 



their book value shows. Land may also have increased in 
present replacement value over its cost value. Experienced 
engineers can perceive whether or not there is a wide gap 
between book value and present replacement value as affected 
by the above mentioned factors. Such a survey of any fixed 
assets is called an appraisal. 

Appraisals are made to show what the present estimated 
sound or accurate value of fixed assets is presumed to be for 
the following purposes: 

1. To provide a basis for obtaining adequate insurance 
protection. 

2. To establish accurate statements for credit purposes in : 

a. Borrowing money. 

b. Floating bonds. 

c. Selling additional capital stock. 

3. To show the true net worth prior to: 
a. Selling the business. 

6. Effecting a combination. 

Whatever the reasons may be for having an appraisal 
made, the pertinent point to keep in mind is that any increase 
in value actually has not been realized. Therefore no profit 
has been made. Consequently, the increase in value should 
not be credited to earned surplus. If the replacement value 
of the land is $10,000 greater than the book value shown at 
cost, then the entry to record the fact would be : 

General Journal 



19- 
Mar. 



25 Land $10,00000 

Reserve for Appraisal Valuation $10,00000 

To record the estimated in- 
crease in the value of the land 
as result of an appraisal made 
Mar. 16, 19, 



The amount representing the increase in the land value which 
is credited to the reserve account remains unchanged until 
another appraisal is made, or until the land is sold. 

7. Secret Reserves. 

Secret reserves are unrecorded on the books. They 
result from depreciation rates being used which tend to 



146 



COST FINDING FOR ENGINEERS 



understate asset values. It is possible to create the same 
condition by charging operating expense with costs which 
should be capitalized as assets. Either of these practices 
may be unintentional. Unscrupulous people may inten- 
tionally carry on these practices in an effort to understate 
profits. By so doing surplus is kept throttled down in order 
that an insufficient amount would be available from which to 
declare dividends. Such practice runs counter to income 
tax procedure and is to be severely condemned. 

8. The Nature of Funds. 

Cash withdrawn from the general cash and set aside for 
some specific purpose is called a "fund." As a general rule a 
fund is created by making cash contributions periodically. 
If the total fund requires some years to build up the sum 
needed, the cash contributions are frequently invested in 
marketable securities which are considered the fund. The 
securities constituting the fund should bring in a steady 
rate of return which of course augments the principal. Petty 
cash, store change and branch-house funds are considered as 
current assets and constitute a part of working capital. 
Other special funds, classified as other assets, are as follows: 

1. Sinking funds. 

2. Redemption funds. 

3. Replacement funds. 

4. Contingency funds. 

This is not a complete classification but is sufficient for 
description insofar as funds pertain to industry. 

A. SINKING FUND. 

A sinking fund is created for the payment of some definite 
liability. The Bonds Payable account is credited when the 
bonds are originally issued as follows : 

Cash Receipts Journal 



Jan. 


31 


Bonds Payable 
Cash (Dr.) 


To record the 
original issue 
of bonds. 




$100,000 


00 

; i 


$100,000 


00 


1 





RESERVES AND FUNDS 



147 



The entry for the periodical contribution to the fund is 
as follows : 

Cash Disbursements Journal 



19 


















July 


15 


Bond Sinking 


Yearly contribu- 
















Fund 


tion authorized 




$10,000 


00 










Cash (Cr.) 


by the board of 








$10,000 


00 








directors on July 


















1, 19. 













When the bonds mature and payment to the bondholders 
takes place, the following entries are made : 

Cash Receipts Journal 



19 


















Dec. 


20 


Bond Sinking 


To return to gen- 








$100,000 


00 






Fund 


eral cash the 
















Cash (Dr.) 


amount neces- 




$100,000 


00 












sary for pay- 


















ment of bonds 


















due Dec. 23, 


















19. 













Cash Disbursements Journal 



19 
Dec. 


23 


Bonds Payable 
Cash (Cr.) 


Payment of 
bonds at 
maturity. 




$100,000 


00 


$100,000 


00 





In the last entry the Bonds Payable account is debited 
when the payment is made to the bondholders. 

Additional entries are needed if the bonds contain a clause 
providing for the fund to be placed in the hands of a trustee. 
Another clause in the bonds may provide for a redemption 
fund reserve. The entries for the latter are shown on page 143. 

B. REDEMPTION FUND. 

A redemption fund is identical with a sinking fund except 
for the purpose for which it is created. Redemption funds 



148 



COST FINDING FOR ENGINEERS 



provide for the redeeming of indebtedness, usually capital 
stock, which is to be called at some future date. The entry 
for the periodical contribution to the fund is as follows: 



Cash Disbursements Journal 



19 


















July 


1 


Stock Redemption 


Payment of an- 
















Fund 


nual contribu- 




$2,718 


46 










Cash (Cr.) 


tion to the fund. 








$2,718 


46 



At the end of each period, the fund having been invested at 
interest, an entry must be made to record the income earned: 

Cash Receipts Journal 



Dec. 


31 


Income on Stock Re- 


Interest earned on 
















demption Fund 


fund. 








$81 


35 






Cash (Dr.) 






$81 


35 







To account for the income on the fund, an entry must be made 
to transfer the income to the Fund account as follows: 

Cash Disbursements Journal 



19 


















Dec. 


31 


Stock Redemption 


Income on fund 
















Fund 


transferred to the 




$81 


35 










Cash (Cr.) 


fund account. 








$81 


35 



The entries at the time of the maturity of the bonds will be: 

Cash Receipts Journal 



19 


















Jan. 


1 


Stock Re- 


Transfer of stock 








$100,000 


00 






demption 


redemption fund 
















Fund 


to general cash. 
















Cash (Dr.) 


* 




$100,000 


00 







RESERVES AND FUNDS 
Cash Disbursements Journal 



149 



19 


















Jan. 


10 


Capital Stock 


Payment of stock- 




$100,000 


00 










Cash (Cr.) 


holders for stock 








$100,000 


00 








maturing at this 


















date. 













C. REPLACEMENT FUND. 

A fund created for the purpose of providing for the replace- 
ment of certain tangible fixed assets is termed a replacement 
fund. This practice is followed only in case the asset to be 
replaced represents an unusually large investment, the 
purchase of which would be too great a drain on the general 
cash. The contributions to the fund are based upon estimates 
which endeavor to have a sufficient amount in the fund to 
provide for the purchase of the new unit when the time 
arrives. 

D. CONTINGENCY FUND. 

Amounts of cash set aside to meet anticipated but uncer- 
tain events are called contingency funds. Any number 
may be created for such possibilities as floods, strikes, pending 
damage suits in long-drawn-out litigation, obsolescence, etc. 

9. Computing the Fund Contributions. 

The periodic contribution to any sinking fund is usually pre- 
determined by setting up a table of annuites. For illustration, 
consider that a fund of $50,000 is to be provided over a period 
of 5 years, equal contributions being made at the end of 
each year, and the fund to earn interest at 6 per cent. The 
annual contribution may be ascertained from the above 
data. 

(1) The amount of $1 at 6 per cent compound interest for 5 years 
written as (1.06) equals 1.33822558. 

(2) 1.33822558 compound amount. 
1. principal. 
0.33822558 compound interest. 

(3) 0.33822558 * 0.06 = 5.637093, the amount of an ordinary 

annuity of $1 at 6 per cent compound interest 
for 5 years. 

(4) $50,000 4- 5.637093 = $8,869.82 periodic contribution. 



150 



COST FINDING FOR ENGINEERS 



End of year 


Contribution 


Interest 


Total fund 


1 


$ 8,869 82 




$ 8,869 82 


2 
3 
4 
5 


8,869.82 
8,869.82 
8,869.82 
8.869.82 


$ 532.19 
1,096.31 
1,694.28 
2,328.12 


18,271.83 
28,237.96 
38,802.06 
50,000.00 




$44,349.10 


$5,650.90 





Questions 

1. Describe what is meant by a "reserve" account. 

2. What is meant by a " valuation " reserve? Name some illustra* 
tions of this type of a reserve. 

3. What is the function of the account, Reserve for Uncollectible 
Accounts? 

4. What different bases are used for estimating the amount of uncollec- 
tible accounts? 

5. Why should doubtful accounts be considered as an expense in 
the present period when it is not definitely known until some subsequent 
period which customers' accounts and what amounts are uncollectible? 

6. How should the adjustment for estimated uncollectible customers' 
accounts be handled in the work sheet? 

7. What adjusting journal entry is made to reflect in the ledger 
accounts the estimated loss from accounts receivable? 

8. When a customer's account proves to be uncollectible, what 
journal entry is necessary to write the balance in the account off the 
books? 

9. What disposition is made of the balance in the account, Reserve 
for Uncollectible Accounts if the amount of actual worthless accounts 
proves to be more or less than the estimated amount set up in the reserve 
account ? 

10. Differentiate between an operating reserve and a valuation 
reserve. 

11. Explain the function of maintenance reserves. Give an illustra- 
tion of this type of reserve. 

12. Explain the use of the account, Reserve for Inventory Shortage. 

13. What is meant by "liability reserves?" Name several specific 
accounts which are listed under this classification of reserves. 

14. Explain the difference between capital and operating reserves. 

15. Name and describe the function of several capital reserves. 

16. In what manner are captial reserves created? 

17. What disposition is made of the capital reserve after the purpose 
has been accomplished for which it was created? 

18. Explain the nature of the Reserve for Federal Income Tax account. 

19. Describe what is meant by an appraisal reserve. 

20. For what purposes are appraisals of tangible fixed assets made? 



RESERVES AND FUNDS 151 

21. What is the important principle to remember in connection with 
recording the appraisal valuation? 

22. What is a secret reserve? 

23. Contrast a fund account with a reserve account. 

24. Explain the use of: 
a. Sinking fund. 

6. Redemption fund. 

c. Replacement fund. 

d. Contingency fund. 



CHAPTER X 
THE CONSTRUCTION OF ACCOUNTING STATEMENTS 

1. The Purpose of Preparing Accounting Statements. 

Accounting statements are prepared at the close of each 
month, quarter, half year, or year. The majority of firms 
prepare them monthly and yearly. They may be prepared at 
any time if all the postings are complete. 

Accounting statements portray in summary form the results 
of the hundreds and thousands of transactions which have 
taken place during the accounting period. The three account- 
ing statements already described present the following 
information : 

1. The statement of income, profit and loss is a history 
of what has happened during each accounting period, dis- 
closing the items of income and expense which have resulted 
in a net profit or a net loss. 

2. The statement of ownership shows in what amount and 
why the owner's capital account has changed from the begin- 
ning to the close of the accounting period, 

3. The balance sheet sets forth the financial condition of 
the business. It shows the asset values owned; the liabilities 
owed; and the ownership interest at the date prepared. 

By reviewing the information contained in these three 
accounting statements, the engineer and executive may make 
comparative analyses, substantiate surmises, establish deduc- 
tions, interpret trends, and determine policies. Intelligent 
and effective managerial control and guidance are the fruits 
of carefully perusing these statements. 

2. The Statement of Income, Profit and Loss. 

This statement should be prepared from the work sheet 
after the latter has been completed. Emphasis is again 
placed on the type of account used in the preparation of the 
statement. The operating income and expense accounts 
are used exclusively in the preparation of this statement. 

152 



THE CONSTRUCTION OF ACCOUNTING STATEMENTS 153 

The statement of income, profit and loss may be said to be 
both supplementary and complementary to the balance sheet. 
It is supplementary in that it gives information pertaining to 
the financial condition of the business which is impossible to 
show in the balance sheet. t It is complementary in that it 
gives a complete history of transactions in summary form 
concerning the factors bringing about the net profit or net 
loss. 

The accepted form for the statement of income, profit and 
loss is the so-called " report" form as shown below. The 
heading of the statement is as important as the information 
which it contains. The name of the concern, name of the 
statement, and the date should always be shown in the order 
mentioned. It is significant to note that the date is for an 
elapsed period of time. A comprehensive income, profit and 
loss statement ^or a trading concern may be seen as follows: 

FORM 31 
W. E. CONKEL 

STATEMENT OF INCOME, PROFIT AND Loss 
For the Period Jan. 1, 19 to Dec. 31, 19 

Sales . $256,807.12 ' 

Less: Sales Returns and Allowances 10,631.03 

Net Sales ! $246, 176.09 

Cost of Goods Sold: 

Inventory, Jan. 1, 19 $ 38,894. 16 

Purchases $160,203.66 

Less: Purchase Returns and Allowances . . 571 .53 

Net Purchases $159,632. 13 

Freight and Cartage In 2,073.81 161,705.94 

Cost of Goods Available for Sale $200 , 600. 10 

[nventory, Dec. 31, 19 27,893.72 

Cost of Goods Sold 172,706.38 

Gross Pro/it on Sales $ 73,469. 71 

Marketing Expenses: 

Salesmen's Salaries and Commissions $ 23,584.08 

Salesmen's Traveling Expenses 3, 568. 89 

Store and Warehouse Wages 9,809. 13 

Automobile Expense 3 , 677 . 24 

Depreciation on Automobile 1 , 545. 24 

Driver's Wages 2,584. 17 

Freight and Express Out 1,503.89 

Shipping Expense and Supplies 1 , 137. 56 

Store Expense 585. 27 

Advertising 1,121.92 

Depreciation on Store Fixtures 260.73 

Total Selling Expenses 49,378.12 

$ 24.091.59 



154 COST FINDING FOR ENGINEERS 

FORM 31. (Continued) 

Administrative Expenses: 

Rent $ 9,000.00 

Heat, Light, and Power 1 , 185. 43 

Telephone and Telegraph 718. 34 

Office Kxpense and Supplies 2 , 153 . 50 

Postage 854 . 73 

Insurance 1,778.46 

Legal and Professional Expense 2 , 656 . 10 

Office Salaries 8,576.97 

Depreciation on Office Equipment 505. 45 

Taxes 1.096.23 

Total Administrative Expenses * 28,525.21 

Net Loss from Operations $ 4 , 433 . 62 

Incidental Income: 

Commissions Earned $ 639 . 30 

Interest Earned 14 . 00 

Rentals Earned 4,075.44 

Worthless Accounts Collected 60. 33 

Purchase Discount 3,598.83 

Total Incidental Income 8^387.90 

$ 37954728 

Incidental Expenses: 

Donations $ ' 60.08 

Doubtful Accounts 1 , 571 . 31 

Interest and Discount Paid 375 . 78 

Sales Discount 2,580.31 

Total Incidental Expenses 4,587.48 

Net Loss for Period, Jan. 1, 19 to Dec. 31, 19 $ 633. 20 

The statement of income, profit and loss is composed of 
four major sections, namely, 

1. Operating Income (Sales). 

2. Cost of Goods Purchased and Sold, or Cost of Goods Manu- 
factured and Sold. 

3. Operating Expenses. 

4. Incidental Income and Expenses. 

The various aspects of each of these sections require* some 
detailed description. 

By operating income is meant the revenue resulting from 
the chief purpose for which the business was organized. 
Sales are the chief source of income for trading and manu- 
facturing concerns. The purpose for organizing and operating 
such concerns is to sell, at a profit, the goods purchased or 
manufactured. Hence, sales constitute the operating income. 
The amount of gross sales should always be compared with 
the amount of net sales in the statement. The difference 
between gross and net sales is the amount of allowances on 
and the return of sales. A study of this comparison gives a 
valuable index to the management. Two sources of loss arise 
with the return of or allowance on a sale. First, the net 



THE CONSTRUCTION OF ACCOUNTING STATEMENTS 155 

income is reduced in volume, and secondly, overhead expenses 
are increased in the form of correspondence, material handling, 
and bookkeeping involved in the return or allowance. There 
is little cause for alarm if the percentage of returns and 
allowances on sales is small in comparison with the gross 
sales. If the percentage is relatively high, the causes should be 
analyzed. What may be some of the causes for a high 
percentage of returns and allowances on sales? The most 
common ones are as follows: 

1. Poor quality of goods sold, which means either: 

a. The purchase of inferior goods by the vendor. 

b. Faulty manufacture. 

2. Salesmen have misrepresented goods to boost sales, 
and incidentally their commissions. 

3. Salesmen have oversold their customers. 

4. The shipping department has not exercised proper care 
in packing. 

The second major section of the income, profit and loss state- 
ment analyzes the "cost of goods purchased and sold," or the 
"cost of goods manufactured and sold/ 7 dependent upon the type 
of business for which the statement is prepared. The former 
type of "cost" is described in this chapter; the latter in Chaps. 
XXIV and XXV. This section of the statement contain^ no 
items except those pertaining to the cost of the merchan- 
dise. Purchases should also be shown in both the gross 
and net amounts. The difference known as "purchase returns 
and allowances" is likewise a red target for the engineer to 
scrutinize. In the Purchase Returns and Allowance account 
balance is reflected the buying policy. Is the buyer or the 
purchasing agent exercising the best policies? The cost of 
freight, express, parcel post, and cartage on goods received 
for sale is considered as an additional cost of goods, and is 
added to the net purchases. The total cost of net purchases 
plus the inventory of merchandise inherited from the pre- 
ceding accounting period becomes the cost of goods available 
for sale during the period. From this total is deducted the 
cost value of the goods remaining unsold, which gives the 
"cost of goods sold." 

Much care must be exercised in ascertaining inventory 
values to be used in the preparation of the income, profit and 
loss statement. The inventory figures should be very care- 



156 



COST FINDING FOR ENGINEERS 



fully scrutinized. This is true because of the manner in which 
the value of the inventory is determined in a large business 
concern. Many employees are used in counting the units, 
which in turn have to be priced, extended, and totaled. A 
great many errors may creep in during the process of the 
physical count, pricing, and price extension, so that the total 
inventory figure may be far from an accurate one. In the 
larger, modern trading and manufacturing concerns, perpetual 
inventories obviate these criticisms to some degree. Even 
though a perpetual inventory may be in use, periodic checks on 
the quantities are maintained. Future chapters describe the 
handling of inventories in greater detail. Since the inventory 
value is ascertained through the combined efforts of many, 
its value may be grossly misstated. If such is the case, the 
profits likewise will be misstated. An illustration will show 
the effect of misstating the inventory value. 

FORM 32 
COMPARATIVE CONDENSED STATEMENTS OF INCOME, PROFIT AND Loss 



Net Sales $246, 176.09 

Cost of Goods Sold: 

" Inventory, Jan. 1, 19 $ 38,894.16 

Net Purchases 159,632. 13 

Freight and Cartage In 2.073.81 

Cost of Goods Available for 

Sale $200,600.10 

Inventory, Dec. 31, 19 ... 27,893.72* 

Cost of Goods Sold 172,706.38 



Gross Profit $ 73,469.71 

Marketing Expenses $ 49,378. 12 

Administrative Expenses 28 , 525. 21 77,903.33 

Net Loss from Operations $ 4 , 433 . 62 

Net Profit from Operations 

Incidental Income 8, 387. 90 



Incidental Expenses , 

Net Loss for Period to Capital . . , 
Net Profit for Period to Capital . 



3,954.28 
4,587.48 



633.20 



$246,176.09 



$ 38,894.16 

159,632.13 

2,073.81 



$200,600.10 
37,893.721 



$ 49,378.12 
28,525.21 



162,706.38 
$ 83,469.71 

77,903.33 

$ 5,566.38 
8,387.90 

$ 13,954.28 
4,587.48 

$ 9,366.80 



1 Note difference of $10,000 in the closing inventory values. 



The amounts shown in the first two columns at the left 
are taken from the detailed income, profit and loss statement 
shown in Form 31. The amounts in the two columns on the 
right-hand side are identical with those to the left with the 
exception of the inventory value at Dec. 31, 19 , which is 
shown at a value of $37,893.72. Assume that this overstate- 



THE CONSTRUCTION OF ACCOUNTING STATEMENTS 157 

ment of the inventory value by $10,000 was a result of an error 
in footing the total of the inventory sheets. This causes the 
cost of goods sold to be understated by $10,000, with a result- 
ant overstatement of the gross profit by $10,000, and a final 
net profit of $9,366.80, instead of a final net loss of $633.20. 
It is thus shown that an overstated inventory figure at the 
close of the period tends to overstate the net profit. Con- 
versely, an understated inventory figure at the close of the 
accounting period will cause the net profit to be understated. 
Conservative accounting practice adheres to the policy of 
valuing inventories at " cost or market, whichever is the lower." 
In so doing, profits are not overstated. An overstatement of 
profits creates a false enthusiasm on the part of the owners as 
to earnings and financial condition. 

By comparing the net sales with the cost of goods sold, 
gross profit is ascertained. Gross profit must be more than 
sufficient to cover all operating expenses and incidental 
expenses if a net profit is to be realized. Goods purchased or 
manufactured must have a mark-on of profit sufficiently high 
to provide for an adequate percentage of gross profit to cover 
both operating and incidental expenses as well as providing for 
an adequate rate of return on the capital invested. 

The operating expenses comprise the third major section 
of the income, profit and loss statement. Usually operating 
expenses are divided into two groups, namely, 

1. Marketing expenses. 

2. General and administrative expenses. 

Included under the caption of "marketing expenses " should 
be all the costs of selling and distributing the product. Gen- 
eral and administrative expenses should include all costs 
involved in carrying out the executive policy of the business. 
The combined selling, and general and administrative expenses 
deducted from the gross profit leaves a remainder known as 
the net profit or net loss from operation of the business. 

The fourth and last section of the statement of income, 
profit and loss, itemizes the incidental expenses and incidental 
incomes. This final section of the statement is otherwise 
known as "other income and expense," " non-operating income 
and expense," and ' 'financial management income and expense," 

The items listed under incidental income and incidental 
expense are the miscellaneous income and expense items which 



158 COST FINDING FOR ENGINEERS 

arise incidentally in carrying on trading or manufacturing 
operations. The business is not organized expressly for the 
purpose of earning such income or incurring such expenses. 
But during the process of carrying on the ordinary business 
transactions these items of expense and income are bound to 
arise. Since they represent business transactions they must 
be recorded. 

The final net profit or net loss, which is ascertained after 
taking into consideration the incidental expenses and income 
with the net operating profit or net loss from operations, is 
the figure used to adjust the owner's Capital account at the 
close of the accounting period. 

3. The Statement of Ownership. 

It has been mentioned that the statement of ownership 
is the connecting link between the statement of income, 
profit and loss and the balance sheet. In addition to per- 
forming this function, the statement of ownership shows all 
the factors changing ownership during the accounting period. 
The factors influencing ownership, so far described, are as 
follows : 

1. Transactions recorded during the period: 

a. Withdrawals of merchandise, cash, or other assets by 
the owners. 

b. Additional investments of cash or other assets by the 
owners. 

c. Assumption of owner's debts by the business. 

2. Net profit or net loss of the accounting period as ascer- 
tained in the work sheet, or by the preparation of the income, 
profit and loss statement. 

a. Final net profit, 

6. Final net loss. 

Ownership either increases or decreases within any given 
accounting period in accordance with the relative effect of the 
various factors named above. These factors are always 
variables. A net profit for the period does not necessarily 
imply that a net increase in ownership will result. With- 
drawals in^ excess of the net profit or combined net profit 
and added investments will result in a net decrease in owner- 
ship. This condition is illustrated in Case 1, below. Three 



THE CONSTRUCTION OF ACCOUNTING STATEMENTS 159 



other combinations also show the influence of the variables on 
the owner's Capital account. 





Case 1 


Case 2 


Case 3 


Case 4 


Capital Account at Beginning of 
the Period 


$40,000 


$40,000 


$40,000 


$40,000 


Additional Investments 


2,500 


5,000 


8,000 


3,000 


Withdrawals 


$42,500 
5,500 


$45,000 
2,000 


$48,000 
2,000 


$43,000 
4,000 


Net Ownership Investment before 
Considering the Net Profit or 
Net Loss 


$37,000 


$43,000 


$46,000 


$39,000 


Net Profit 


2,500 


2,500 






Net Loss 






1,000 


1,000 












Capital Account at the Close of 
the Period . . 


$39,500 


$45,500 


$45,000 


$38 , 000 












Net Increase in Ownership 




$ 5,500 


$ 5,000 




Net Decrease in Ownership 


$ 500 






$ 2 000 























Withdrawals and additional investments by the owner do 
not constitute an expense of or an income to the business. 
The sole owner of a business may elect, or partners may agree, 
to withdraw a weekly wage. Their argument is, usually, 
that if they did not devote their entire attention to the busi- 
ness, they would be forced to hire a manager who would have 
to be paid a salary. This appears to be a logical contention at 
first thought. But from an economic point of view, individual 
owners engage in business for the purpose of profit making, 
not salary earning. The Federal income tax law also takes 
this point of view. Provisions of the law specify that wages 
and salaries withdrawn by individual or partnership owners 
must not be considered as expenses but withdrawals of 
anticipated profits. This is equivalent to saying that with- 
drawals by the owner, are a decrease of capital investment. 
When the owner makes an investment, there is not an element 
of profit involved in the transaction; consequently, income is 
not affected. Withdrawals and additional investments are 
purely capital transactions. 

Adjustments of profits or losses for prior periods also 
are shown in the statement of ownership. Errors may have 
been made in analyzing or recording transactions which are not 



160 COST FINDING FOR ENGINEERS 

revealed until some subsequent accounting period. If the 
errors affect operating accounts, then the net profit for some 
preceding year has been misstated, with a concomitant mis- 
statement of the ownership at the close of that particular year. 
Ownership then is inaccurate until it is corrected. Theoreti- 
cally, the amount of the error should be a direct adjustment in 
the owner's Capital account. In practice, however, unless 
the error is quite large in amount, it is handled as a current 
transaction in the period when discovered. The reason for 
practice taking precedent over theory is the Federal income 
tax law. A provision of this law requires an amended tax 
return to be prepared whenever the profit for a prior year 
has been adjusted, for which a tax return has already been 
submitted. 

The statement of ownership for the business of William E. 
Conkel, whose statement of income, profit and loss appears 
in Form 31, is shown as follows: 

FORM 33 

WILLIAM E. CONKEL 

STATEMENT OF OWNERSHIP 

Jan. 1, 19, and Dec. 31, 19 

Capital, Jan. 1, 19 $74,455.75 

Additional Investments within the Year none 

$74,455.75 

Withdrawals within the Year $7,800.00 

Net Loss for the Period, Jan. 1, 19 , to Dec. 31, 

19 633.20 8,433.20 

Capital, Dec. 31, 19 $66,022.55 

The heading is the first point to consider in preparing the 
statement of ownership. It consists of the name of the con- 
cern, name of the statement, and the date. The date should 
be shown both at the beginning and at the close of the account- 
ing period in the heading. The ownership value at the close 
of the year, $66,022.55, is the figure used in the balance sheet, 
representing Conkel's capital at Dec, 31, 19 . This state- 
ment of ownership, thus, is the bridge between the income, 
profit and loss statement and the balance sheet. 

4. The Statement of Surplus. 

In a corporation, the statement of surplus is substituted for 
the statement of ownership. The statement of surplus does 



THE CONSTRUCTION OF ACCOUNTING STATEMENTS 161 

not include the capital stock value. Its sole purpose is to 
show the several items that have brought about the change in 
the Surplus account during the accounting period. The fac- 
tors that increase and decrease the surplus of a corporation 
are as follows: 

1. Increases result from: 

a. The final net profit for the present period. 

b. The surplus adjustments resulting from final net 
profit or net loss corrections from prior periods. 

c. The surplus reserve balances that are transferred back 
to surplus after the purpose for which they were 
created has been fulfilled. 

2. Decreases result from: 

a. The final net loss for the present period. 
6. The surplus adjustments resulting from final net 
profit or net loss corrections from prior periods. 

c. The creation of surplus reserves for some specific 
purpose. 

d. The amount of Federal income tax payable to the 
Federal Government. 

e. The dividends declared upon the capital stock. 

FORM 33a 
CONKEL CONCRETE COMPANY 

STATEMENT OF SURPLUS 
Jan. 1, 19, and Dec. 31, 19 

Surplus, Jan. 1, 19 $24,455.75 

Add (increases in Surplus) : 

Reserve for pending damage suit (returned 

to Surplus) $10,000.00 

Correction to profit for prior years 2 , 020 . 20 

Total Increases in Surplus 12,020.20 

$36,475.95 
Deduct (decreases in Surplus) : 

Net loss for the period, Jan. 1, 19 to Dec. 31, 

19 633.95 

Reserve for additional Federal income taxes 366.00 

Total Decreases in Surplus 999 . 95 

Surplus, Dec. 31, 19 $35,476.00 

If the total debits to the Surplus account is in excess of the 
total credits, then the debit balance is termed "deficit." A 
deficit should always be shown as a deduction from the capital 



162 COST FINDING FOR ENGINEERS 

stock total in the balance sheet, since the deficit represents an 
impairment of the capital invested. 

An illustration of a statement of surplus is shown in Form 
33a. 

5. The Balance Sheet. 

The balance-sheet derives its name from the ownership 
equation which is ever present in this financial statement. 
Assets are equal to and balance the rights to the assets. The 
rights are those of the creditors of the business who have loaned 
tlieir capital in the form of credit and the capital invested by 
the owner. 

The accounts used in the preparation of the balance sheet 
are capital accounts only. Capital accounts represent the 
real values in the business as follows: 

1. Assets are values owned. 

2. Liabilities are the values owed. 

3. Ownership is the value invested by the owner, plus 
accumulated profits and minus accumulated losses. 

The account form of the balance sheet has been shown in 
preceding illustrations. The report form is used in the follow- 
ing illustration. The date of the balance sheet is quite as 
important in the heading, as it is in the two preceding state- 
ments already described. The date is shown in the balance 
sheet, however, as of the close of a business day on any given 
date which is usually the end of each month. The engineer 
is interested in knowing what the asset and liability values are 
at a certain date. 

The balance sheet for the business of William E. Conkel 
is shown as follows: 

FORM 34 

WILLIAM E. CONKEL 
BALANCE SHEET 



ASSETS 

Current Assets: 

Cash ................................................ $12,210. 14 

Accounts Receivable, Trade ................. $27 , 639 . 08 

Less: Reserve for Uncollectible Accounts .... 1 , 57 1 . 3 1 26 , 067 . 77 

Accounts Receivable, Employees .................... .... 580 . 68 

Commissions Receivable ............................... 339 . 62 

Merchandise Inventory ................................ 27,893.72 $67,091,93 



THE CONSTRUCTION OF ACCOUNTING STATEMENTS 163 

FORM 34. (Continued) 

Temporary Investments: 

Nordyke Novelty Company Bonds 1 480.00 

Fixed Assets: 

Automobiles $ 6 , 180.96 

Less: Reserve for Depreciation 3,090.48 $ 3,090.48 

Store Fixtures $ 1 ,738.20 

Less: Reserve for Depreciation 1.042.92 695.28 

Office Equipment $ 5 , 054 . 50 

Less: Reserve for Depreciation 2,021.80 3,032.70 6,818.46 

Deferred Charges to Operations: 

Prepaid Insurance $ 193 . 57 

Inventory Shipping Supplies 64 . 82 

Inventory Office Supplies 741.03 999 . 42 

Total Assets $75.389.81 

LIABILITIES AND OWNERSHIP 

Current Liabilities: 

Notes Payable $ 783.37 

Accounts Payable 7 ,703 . 84 

Accrued Salaries 520. 16 

Reserve for State Taxes 190.08 $ 9,197.45 

Deferred Credits to Operation: 

Prepaid Rentals Received 169.81 

Ownership: 

William E. Conkel, Capital 66.022.55 

*" Total Liabilities and Ownership $75 , 389 . 81 

1 (Shown at cost; market value $515.) 

Within the bounds of the balance sheet are many items in 
which the engineer is interested. Chief among them is the 
problem of property valuation. The valuation of the inven- 
tory has already been touched upon. Valuation principles 
pertaining to other current and fixed assets are described in 
Chaps. XIII and XIV. Suffice it to enumerate at this point 
the items which have valuation problems: inventories, accounts 
receivable, securities, delivery equipment, land, buildings, 
machinery, furniture and fixture, tools, patterns, patents, etc. 
All tangible fixed assets in a trading or manufacturing plant, 
with the exception of land, are subject to depreciation. 
Depreciation is inseparably tied up with fixed asset valuation. 
The engineer is vitally interested in the phase of accounting 
pertaining to valuation. 

6. The Worth of Accounting Statements. 

The installation and operation of an accounting system are 
prerequisite to effective managerial control. Many business 
transactions occurring within an accounting period would be 
lost sight of at the close of the period if they were not journal- 



164 COST FINDING FOR ENGINEERS 

ized and recorded in the accounts. Accounting statements 
constructed at the close of an accounting period are supposed 
to reflect in summary form the financial status of the business. 
The statements are used as the bases for study, interpretation, 
and the formulation of future plans and policies. Even 
though important decisions are made from the accounting 
statements, there are limitations attached to them. 

Accounting statements are not statements of fact, but 
estimates only. Two persons may prepare the same accounting 
statements from the same trial balance and each show a 
different net profit or net loss. It is quite possible that their 
opinions and estimates would vary in regard to inventories, 
depreciation, and other items subject to valuation. The 
more familiar one is with the theory and principles of account- 
ing, however, the greater are the chances of more accurate 
statements. There is no such thing as a correct or true account- 
ing statement. As long as estimates and opinion are necessary 
in fixing the value of assets subject to depreciation and as long 
as inventory values must be ascertained by reckoning, there 
can never be accounting statements which are correct to the 
last dollar. 

7. Financial Measurements and Comparisons. 

Effective business control results from analyses made from 
accounting statements. The comparison of absolute figures of 
one accounting period with the amounts of like items for 
another period frequently brings to light malconditions within 
the business. The comparison of relative amounts in the form 
of percentages is frequently more enlightening than the com- 
parison of absolute figures. Certain financial measurements 
and ratios exist in both the income, profit and loss statement 
and the balance sheet. Certain relationships are found to 
exist also between the two statements. 

FORM 35 

WILLIAM E. CONKEL 

COMPARATIVE STATEMENT OF INCOME, PROFIT AND Loss 
For the years ended Dec. 31, 19 and Dec. 31, 19 

(Present (Past Year) 
Year) Dec. 31, Dec. 31, Increase or 
19 19 Decrease 1 



Sales: $256,807.12 $245,245.30 $11,561.82 

Less: Sales Returns and Allowances 10,631.03 2,611.98 8.019.05 

Net Sales $246,176.09 $242,633.32 $ 3,542.77 



THE CONSTRUCTION OF ACCOUNTING STATEMENTS 165 

FORM 35. (Continued) 
Cost of Goods Sold: 



Inventory at Beginning of Your . ...... 


$ 38,894.16 $ 35,437.89 $ 3,456.27 
160,203.66 169,234.49 9,030.831 
2,073.81 3,153.46 1, 079.651 




Freight and Cartage in 


Total 


$201,171.63 $207,825.84 $ 6,654.21 l 


i 
Deduct: 


$ 27,893.72 $ 38,894.16 $11,000.441 
571.53 470.10 101.43 


Purchase Returns and Allowances 


Total 


$ 28,465.25 $ 39,364.26 $10,899.01 1 


Net Cost of Goods Sold 


$172,706.38 $168,461.58 $ 4,244.80 




$ 73,469.71 $ 74,171.74 $ 702. 03* 


Marketing Expenses: 
Salesmen's Salaries 


$ 23,584.08 $ 21,226.79 $ 2,357.29 
3,568.89 3,991.16 422.271 
9,809.13 9,991.58 182. 45* 
3,677.24 2,818.74 858,50 
1,545.24 1,542.18 3.06 
2,584.17 3,133.78 549. 6H 
1,503.89 861.21 642.68 
1,137.56 1,113.11 24.45 
585.27 691.43 106. 16 1 
1,121.92 1,393.98 272. 06 1 
260.73 258.10 2.63 


Salesmen's Traveling Expenses 


Store and Warehouse Wages 


Automobile Expense 


Depreciation on Automobile 


Driver's Wages 


Freight and .Express Out 


Shipping Expense and Supplies 


Store Expense 


Advertising 


Depreciation on Store Fixtures 


Total Marketing Expense 


$ 49,378.12 $ 47,022.06 $ 2,356.06 


Balance of Gross Profit After Deducting Mar- 
keting Expenses 


$ 24,091.59 $ 27,149.68 $ 3,058.091 

$ 9,000.00 $ 8,500.00 $ 500.00 
1,185.43 1,098.79 86.64 
718.34 561.75 156.59 
2,153.50 2,175.22 21. 72 1 
854.73 1,043.21 188.481 
1,778.46 1,547.34 231.12 
2,656.10 2,489.36 166.74 
8,576.97 7,839.88 737.09 
505.45 499.71 5.74 
1,096.23 1,024.28 71.95 


Administrative Expenses: 
Rent 


Heat, Light and Power 


Telephone and Telegraph 


Office Expense and Supplies. 


Postage 


Insurance 


Legal and Professional Expense 


Office Salaries 


Depreciation Office Equipment 


Taxes 


Total Administrative Expenses 


$ 28,525.21 $ 26,779.54 $ 1,745.67 


Net Pro/it or Loss from Operations 


$ 4,433.621$ 370.14 $ 4,803.76* 


Incidental Income: 
Commissions Earned 


$ 639.30 $ 1,323.57 $ 684. 27* 
14.00 4.64 9.36 
4,075.44 3,536.93 538.46 
60.33 101.48 41.151 
3,598.83 3,050.03 548.80 


Interest Earned 


Rentals Earned 


Worthless Accounts Collected 


Purchase Discount 


Total Incidental Income 


$ 8,387.90 $ 8,016.70 $ 371.20 


Incidental Expenses: 
Donations. 


$ 3,954,28 $ 8,386.84 $ 4,432.56* 


$ 60.08 $ 467.90 $ 407. 82* 
1,571.31 1,218.99 352.32 
375.78 96.05 279.73 
2,580.31 2,417.20 163.11 


Worthless Accounts 


Interest and Discount Paid 


Sales Discount 


Net Income or Loss C 1 ) for the Year 


$ 4,587.48 $ 4,200.14 $ 387.34 


$ 633.201$ 4,186.70 $ 4,819.90 



1 Items so marked represent decreases or losses. 

In the preceding comparative statement of income, profit 
and loss, the amount of absolute increase or decrease of each 
item is shown. Even though gross sales increased $11,561.82 
over the preceding year, there was an accompanying decrease 
of $4,819.90 in net profit. The causes are seen to lie chiefly in 



166 COST FINDING FOR ENGINEERS 

increased sales returns, and increased marketing and adminis- 
trative expenses. 

8. Income, Profit and Loss Statement Measurements and 
Ratios. 

a. Ratios of Costs and Expenses to Net Sales. 

While the preceding comparative statement has its advan- 
tages in the detailed comparisons shown, it also has its limita- 
tions. The preceding statement may be earnestly reviewed, 
yet many facts may escape observation when percentages 
and ratios are not shown. Percentages give relative dif- 
ferences which furnish a different concept in the comparison of 
income and costs, than does a comparison of absolute figures. 

A very common financial measurement is made by showing 
the ratio of "net sales " to all of the other major divisions 

FORM 36 

WILLIAM E. CONKBL 

CONDENSED COMPARATIVE STATEMENT OF INCOME, PROFIT AND Loss 
For the Years Ended, Dec. 31, 19 and Dec. 31, 19 

(Present year) (Past year) 
Dec. 31, 19 Dec. 31, 19 

Sales $256,807.12 $245,245.30 

104.32% 101.07% 

Net Sales 246, 176.09 242,633.32 

100% 100% 

Cost of Goods Sold $172,706.38 $168,461.58 

70,16% 69.43% 

OrossProfit $ 73,469.71 $ 74,171.74 

29.84% 30.57% 

Marketing Expenses $ 49,378.12 $ 47,022.06 

20.06% 19.38% 

Administrative Expenses $ 28,525.21 $ 26,779.54 

11.59% 11.04% 

Net Profit or (Loss 1 ) for Operations. $ 4,433.62! $ 370.14 

1.81%* 0.15% 

Total Incidental Income $ 8,387.90 $ 8,016.70 

3.41% 3.30% 

Total Incidental Expenses $ 4,587.48 $ 4,200.14 

1.86% 1.73% 

Net Income or (Loss 1 ) $ 633. 20 1 $ 4,186.70 

Q.26%* 1.72% 

1 Items BO marked represent losses. . 



THE CONSTRUCTION OF ACCOUNTING STATEMENTS 167 

of the statement of income, profit and loss. The base used 
in making the comparisons is always net sales. Net sales 
represents a more conservative figure than gross sales, since 
no income is realized from the sales returns and allowances. 

A condensed statement of income, profit and loss will 
illustrate this method of financial measurement. 

Thus the ratios of all the main captions of the statement of 
income, profit and loss are shown. These ratios are of 
greater significance than absolute figures, because the percent- 
age to the whole (net sales 100 per cent) is much more easily 
visualized. The fluctuating value of the dollar is likewise 
eliminated when percentages are used. In nearly every 
line of business endeavor, through the mediiyn of trade 
associations, there has been worked out a standard percentage 
for each of these main captions. A member of the associa- 
tion, by comparison, can easily tell whether his result is out of 
line with the standard. Over a period of several years an 
average of these ratios may be used to check the percentages of 
each succeeding year for any business. 

b. Turnover of Inventories. 

The turnover of inventories is another valuable measure- 
ment of the financial welfare of the business. The turnover 
of the merchandise inventory expresses the rapidity with which 
the stocks of goods are disposed of and replenished. One 
of the secrets of financial success is quick inventory turnover. 
The smaller the amount tied up in inventories, to handle a 
given volume of sales, the greater will be the percentage of 
return earned on the investment. 

The turnover of merchandise inventory is computed by 
dividing the cost of goods sold by the average of the inven- 
tories on hand at the beginning and the close of the accounting 
period. A more refined turnover figure may be computed by 
averaging the monthly inventories. On page 153, the inven- 
tories are shown to be as follows: 

At the Beginning of Year $ 38,894. 16 

At End of Year 27 , 893. 72 

2)66,787.88 

Average Inventory $ 33,393.94 

Cost of Goods Sold $172,706.38 

$172,706.38 + $33,393.94 - 5.17 



168 COST FINDING FOR ENGINEERS 

The merchandise for the year was turned over 5.17 times. 
This is equivalent to saying that a stock of goods costing 
$33,393.94 was purchased and sold 5.17 times during the year. 
If a smaller stock of goods could have been maintained with the 
same amount of sales being made, the turnover naturally 
would have been greater. 

The turnover of work in process inventory as shown in 
the statement of cost of production in Chap. XXV is com-' 
puted by dividing the cost of goods produced by the average 
work in process inventory. 

Turnover of the raw material inventory is computed by 
dividing the cost of raw materials used by the average raw 
material inventory. 

9. Balance Sheet Measurements and Ratios. 

a. Working Capital and Ratios. 

One of the most important financial measurements found 
in the balance sheet is the working capital ratio. Net working 
capital is the difference between the current assets and 
current liabilities. Hence the necessity for proper classifica- 
tion of capital accounts in the balance sheet. 

The net working capital of William E. Conkel's business as 
shown in the balance sheet in form 34 is $57,894.48, deter- 
mined in the following manner : 

Current Assets $67,091.93 

Current Liabilities 9, 197.45 

$57,894.48 

The ratio of current assets to current liabilities is 7.29 times. 
The importance of working capital and a sufficiently high 
ratio is to take advantage of purchase discounts which insure 
the payment of the current liabilities as they mature. At 
the same time sufficient inventories and cash should be on 
hand to insure ready shipments and provide for the payment of 
current expenses. * 

6. Investment of Capital in Various Assets. 

In this financial measurement may be seen the managerial 
policy of the business. What is the percentage of total capital 
invested which is tied up in the various asset groupings? 



THE CONSTRUCTION OF ACCOUNTING STATEMENTS 169 

A comparison of balance sheets will show whether machinery 
is being increased in value from year to year, thereby displacing 
labor. What is the ratio of current to fixed asset groups? 
Is there too much money tied up in equipment in proportion to 
sales? These are only a few of the pertinent questions that 
may arise after a comprehensive study of the balance sheet by 
the engineer. 

10. Relationship between the Statement of Income, Profit and 
Loss and the Balance Sheet* 

a. Turnover of Net Working Capital. 

This turnover figure is found by dividing net sales by 
the average amount of working capital on hand at the begin- 
ning and the close of the same accounting period. 

Net Working Capital Jan. 1, 19 $ 57,968.81 

Net Working Capital Dec. 31, 19 57,894.48 

$115,863.29 



Net Working Capital Average $ 57,931 .65 

Net Sales $246, 176.09 

$246,176.09 -5- $57,931.65 = 4.249, net working capital turnover. 

The prosperity of the business varies in direct proportion 
to the turnover of net working capital. An average working 
capital of $57,931.65 was available during the same period in 
which net sales of $246,176.09 were made. An increase of sales 
with the use of as little working capital as possible means 
the greater will be the return on the ownership investment, 

6. Turnover on Fixed Property Investments. 

This turnover figure represents the relationship between 
the volume of sales and the amount of capital tied up in plant 
and equipment. The greater the net sales and the less the 
amount of plant and equipment investment the smaller the 
fixed charges, such as insurance, depreciation, etc. 

The turnover figure is found by dividing the amount of 
net sales by the amount of the net fixed property investment. 

c. Turnover of Accounts Receivable. 

The turnover of accounts receivable is a reflection upon 
the credit and collection policy of the business. Capital tied 
up in customers' accounts, past due, costs the owner money. 



170 COST FINDING FOR ENGINEERS 

If the credit period of the business concern is uniformly 
"2/10 n/30 ; " the turnover or age of accounts receivable 
will show whether the accounts are past due. 

The turnover figure is ascertained by the following pro- 
cedure : 

Net Accounts Receivable at Close of Period er moiiths 



Net Sales for Period 

(Number of days in month) * Age in days of Accounts Receivable 
$26,067.77 



$246,176.09 



X 12 X 30 - 0.105890 X 360 => 38 days. 



This figure of 38 days means that the collection of out- 
standing accounts receivable is 8 days over the net credit 
period of 30 days. 

d. Return Earned on Capital Invested. 

This financial measurement shows the Amount earned on 
the owner's investment. It is Jfound by dividing the net 
profit by the amount of owner 's capital invested. It is an 
index disclosing whether or not a sufficient percentage is being 
earned on the capital invested. 

11. Other Financial Measures and Ratios. 

Although the more important financial measures and ratios 
have been described, there are many others which may be com- 
puted. Lack of space prevents presentation of additional ones 
in this text. 

Questions 

1. What purposes are served by the preparation of the statement of 
income, profit and loss? 

2. What accounts are used in its preparation? 

3. What should be included in the heading of this statement? 

4. What are the main divisions of the statement of income, profit 
and loss? 

5. In what manner is the cost of goods sold computed? 

6. What is the difference between operating income and incidental 
income? 

7. Differentiate between gross profit and net profit. 

8. If the new inventory value is overstated, what is the effect upon 
the net profit? The net loss? 

9. Operating expenses are usually divided into what groups? 

10. What items are included under incidental expenses? 

11. What is the function of the statement of ownership? 

12. What items are used in its preparation? 



THE CONSTRUCTION OF ACCOUNTING STATEMENTS 171 

13. Why are withdrawals by the owner not considered as an expense of 
the business? 

14. In what manner does the heading in the statement of ownership 
differ from the heading of the balance sheet? 

15. What is the purpose of the balance sheet? 

16. What accounts are used in the preparation of the balance sheet? 
What equation underlies its structure? 

17. What major groupings are shown in the balance sheet? 

18. Are financial statements purely statements of fact? 

19. What values result from making a study of comparative income, 
profit and loss statements and balance sheets? 

20. Discuss the relative values of absolute comparisons with ratios 
and financial measurements. 

21. When percentage comparisons are made in the statement of 
income, profit and loss, what item is used as the base? 

22. What is the significance of inventory turnover? 

23. What is working capital and of what importance is it? 



CHAPTER XI 
CLOSING THE OPERATING ACCOUNTS 

1. The Accounting Cycle. 

With the termination of each fiscal period a complete cycle 
of accounting activities has elapsed. These activities in the 
order of their occurrence are as follows: 

1. Recording transactions in the various journals. 

2. Posting from the journals to the ledger accounts. 

3. Preparing the monthly trial balances. 

4. Preparing the work sheet. 

5. Preparing the accounting statements from the work sheet. 

6. Closing the operating accounts. 

7. Preparing a proof trial balance after the process of 
closing has been completed. 

After the proof trial balance has been taken, the ledger 
accounts are again ready to receive postings applicable to the 
next accounting period. 

2. The Process of Closing. 

The term "closing" in accounting terminology means the 
transferring of the balances in the operating accounts to an 
account labeled Profit and Loss. The second step in closing is 
to transfer the balance from the Profit and Loss account to the 
owner's Capital account. The third step is the transference 
of the balance from the owner's Personal account to his Capital 
account. 

The preparation of monthly accounting statements does not 
necessitate closing the operating accounts. Accounting state- 
ments may be prepared from the work sheet. The actual 
process of closing usually takes place but once a year. 

3. The Purpose of Closing. 

The owner's Capital account must reflect the same value, at 
the close of each accounting period, as the balance sheet shows 

172 



CLOSING THE OPERATING ACCOUNTS 173 

at the end of the same period. Thus, a permanent record of 
the amount of capital invested at the end of each fiscal period is 
shown in the ledger. 

The factors causing a change in the Capital account from 
period to period are four in number as follows: 

XT7 .,, i , ., T ( This information is usu- 

a. Withdrawals of capital I 1 , . ., 

7 AJJ i , j.- 1 1 ally recorded in the 

6. Added investments of captial ~ , 

I Personal account. 

^ T A , f ,. f This information is re- 

c. Net loss from operations I , , . , u 

, , T A rj. f ^ \ corded in the summary 

a. Net profit from operations r ,. , 

^ * I ot operating accounts. 

It has been stated previously that the operating accounts 
record the changes in ownership resulting from the operations 
of the business. Separate accounts with various income and 
expense items give a detailed analysis of the period's trans- 
actions pertaining to profit making. These account balances 
are used to prepare the income, profit and loss statement at the 
close of the fiscal period. After these balances have served 
this purpose, they are dispensed with through the process of 
closing. In transferring the balance of each operating account 
to the Profit and Loss account, a permanent record is made on 
the books of the net profit or net loss for each fiscal period. 
The figure reflecting the net profit or net loss for the fiscal 
period should be the same in both the Profit and Loss account 
and the statement of income, profit and loss. 

Another advantage results from closing the ledger. A 
mass of postings are removed from the operating accounts 
which have accumulated during the fiscal period. 

4. The Procedure in Closing the Operating Accounts. 

There are five distinct steps involved in closing the bal- 
ances from the operating accounts in the ledger: 

1. Recording and posting the adjusting entries. 

2. Transferring the balance from the operating accounts 
to the Profit and Loss account. 

3. Transferring the balances from the Profit and Loss 
account to the owner's Capital account. 

4. Transferring the balance from the owner's Personal 
account to the owner's Capital account. 

5. Ruling the operating accounts. 



174 COST FINDING FOR ENGINEERS 

It must be remembered that two other stages of the account- 
ing cycle precede the process of closing. The preliminary step 
in closing is the preparation of the trial balance, which in 
turn is used in the preparation of the work sheet. The trial 
balance provides a complete list of expense and income 
accounts covering the recorded transactions for the accounting 
period. Secondly, the unrecorded data applicable to 
the period must be incorporated with the recorded data 
already in the operating accounts. These unrecorded items 
represent the inventories of materials, merchandise, and 
supplies, accrued expenses, accrued incomes, prepaid expenses, 
prepaid incomes, depreciation, and estimated reserves. 

5. Preparation of Adjusting Entries. 

It has already been described in connection with the new 
inventory, prepayments, and accruals, why it is necessary to 
consider adjustments. The manner in which these adjust- 
ments are handled in the work sheet also has been illustrated. 
After the work sheet has been completed, it is a simple matter 
to record the adjustments. Recording and posting the 
supplementary data unrecorded at the time of closing are 
effected through the adjusting entry. 

Adjusting entries are made in the general journal from 
where they are posted to the ledger accounts. In this 
manner the operating accounts are adjusted to show the 
expense and income accurately for the period. The ledger 
accounts prior to the preparation of a trial balance are illus- 
trated below in order to show clearly how the adjusting entries 
affect the operating accounts. These ledger accounts fur- 
nish the balances which were used in the work sheet illustration 
at the close of Chap. VII. 

C. R. KEHOE 

LEDGER ACCOUNTS BEFORE CLOSING 
Cash Notes Receivable 



$400.00 



$200.00 



Accounts Receivable Merchandise Inventory 



$7,000.00 I $2,300.00 



CLOSING THE OPERATING ACCOUNTS 175 

Furniture and Fixtures Accounts Payable 



$500.00 



C. R. Kehoe, Personal 
$400.00 II 



Sales 



$16 , 760. 00 



Commissions Earned 



$500.00 



Wages 



$1,500.00 



C. R. Kehoe, Capital 



$8,580.00 



Prepaid Rentals Received 
$840.00 



Purchases 



$13,500.00 



Rent 



$2,340.00 



$1,000.00 



Advertising 



$200.00 



Prepaid Insurance 



Office Supplies 



$100.00 



$240.00 



For recording the supplementary data considered in this 
illustration, the adjusting entries are as follows: 



176 



COST FINDING FOR ENGINEERS 
General Journal 



19 
June 



30 (a) Merchandise Inventory $2,65000 

Profit and Loss $2 , 650 00 

To record the value of unsold 
goods on hand at the close of the 
fiscal period. 
(6) Insurance 8000 

Prepaid Insurance 8000 

To charge expense with the 
proportion of prepaid insurance 
applicable to the period. 

(c) Office Supplies Inventory 40 00 

Office Supplies 40 00 

To defer the cost of unused 
office supplies to the next period. 

(d) Prepaid Rentals Received. 805 00 

Rentals Earned 805 00 

To credit income with the 
amount of rental earned appli- 
cable to the present period. 

(e) Taxes 16 76 

Reserve for Taxes 16 76 

To charge expense for the 
period and set up the liability for 
the amount of estimated sales tax. 
(/) Wages 75 00 

Wages Accrued (Payable) 75 00 

To charge expense and set up 
liability for employees 7 wages 
due but unpaid at the close of the 
period. 
(g) Commissions Accrued (Receivable) 19 50 

Commissions Earned 19 50 

To record the income earned 
but not received at the close of 
the period. 



By referring to the work sheet at the close of Chap. VII, 
it will be seen that the adjusting entries are merely duplica- 
tions of the information in the adjustment column in the work 
sheet. It is necessary to have a record in the journal, however, 
as authority for making the postings to the ledger accounts. 

Posting the above adjusting entries affects the following 
accounts in the ledger: 



CLOSING THE OPERATING ACCOUNTS 177 

Accounts Already Opened New Accounts Required 



Merchandise Inventory 



19 

Jan. 1 $2,300.00 

June 30 2 , 650. 00 



Prepaid Insurance 



Office Supplies 



$100.00 



Prepaid Rentals Received 



(d) 



$805.00 



$840.00 



Wages 



$2,340.00 
75.00 



Commissions Earned 



Profit and Loss 



New 

Inventory $2,650.00 



Insurance 



$240.00 (b) $80.00 (6) $80.00 



Office Supplies Inventory 



(c) $40.00 (c)$40.00 



Rentals Earned 



(d) 



Taxes 



$805.00 



(e) $16.76 



Reserve for Taxes 



$16.76 



Wages Accrued (Payable) 



$75.00 



Commissions Accrued (Receivable) 



$500.00 
(g) 19; 50 fa) $19. 50 



6. Closing the Operating Accounts. 

After the adjusting entries have been made and posted, the 
next step in closing is to transfer all operating accounts bal- 
ances to the Profit and Loss account. This includes all 
income and expense accounts whether or not affected by any 
adjustment. The entries required in transferring the balances 



178 



COST FINDING FOR ENGINEERS 



are called " closing entries/' and are made in the general 
journal. 

Time is saved if all income accounts are closed as a group 
and all expense accounts are closed in another separate group. 
The operating* accounts with credit balances are closed by 
making a compound entry, debiting all such accounts, and 
crediting the Profit and Loss account with the total of the 
balances. Such accounts represent incomes or decreases of 
expense. 

The closing entry for the income accounts using the ledger 
accounts of C. R. Kehoe is shown below: 

General Journal 



19 
June 



30 



Sales 

Commissions Earned 
Rentals Earned 
Profit and Loss 

To close all income for the 
period to profit and loss. 



$16,76000 
519 50 
80500 



$18,084 



50 



The operating accounts with debit balances are closed by 
crediting all such accounts and debiting the Profit and Loss 
account with the total of the balances. These accounts 
represent expense items or decreases in income. 

The compound closing entry for the expense accounts is as 
follows: 

General Journal 



19 
June 



30 



Profit and Loss 

Merchandise Inventory 

Purchases 

Wages 

Rent 

Advertising 

Office Supplies 

Insurance 

Taxes 

To close all expenses for the 

period into Profit and Loss 

account* 



$19,571 



76 



5 2,30000 

13,50000 

2,41500 

1,000 

200 

60 



8000 



16 



76 



CLOSING THE OPERATING ACCOUNTS 



179 



After the above closing entries have been posted, the ledger 
accounts appear as follows: 

Cash Notes Receivable 



$400.00 



Accounts Receivable 



$200.00 



Merchandise Inventory 



$7,000.00 



Furniture and Fixtures 



Jan. 1 



$2,300.00 



$500.00 

C. R. Kehoe, Personal 



$400.00 

Sales 



To Profit 

and Low $16,760.00 



$16,760.00 



Commissions Earned 



To Profit 

and Loss $519.50 



$519.50 



$500.00 

19.50 

$519.50 



Wages 



$2,340.00 
75.00 

$2,415.00 



To Profit 

and Loss $2,415.00 

$2.415.00 



Advertising 



$200.00 



$200.00 



To Profit 
andLosa 



$200.00 
$200.00 



June 30 $2,650.00 

Accounts Payable 



To Profit , 

and Loss $2,300.00 



$1,500.00 



C. R. Kehoe, Capital 



$8,580.00 

Prepaid Rentals Received 



$805.00 



Purchases 



$840.00 



$13,500.00 



To Profit 

and Loss $13,500.00 



Rent 



$1,000.00 



To Profit 

and Loss $1,000.00 



Office Supplies 



$100.00 



$100.00 



To Profit 
and Loss 



$60.00 
40.00 

$100.00 



180 COST FINDING FOR ENGINEERS 

Prepaid Insurance Office Supplies Inventory 



$240.00 



Insurance 



$30.00 



$40.00 



Taxes 



$80.00 


To Profit 
and LOBS 


$80.00 







$16.76 



To Profit 
and Loss 



$16.76 



Rentals Earned 



Reserve for Taxes 



To Profit 
and Loss 



$805 00 



$805.00 



$16.76 



Wages Accrued (Payable) Commissions Earned (Receivable) 



$75.00 



Profit and Loss 



$19.50 







Total Expense 




$19,571 


76 






New Inventory 
Total Income 




$ 2,650 
18,084 


00 
50 



After the closing entries covering expense and income have 
been posted to the Profit and Loss account, the balance repre- 
sents the net profit or net loss for the fiscal period. If the 
credit total exceeds the debit total the income is greater than 
the expense, hence a net profit has resulted. If the debit 
total is greater than the credit total, the total expense has 
exceeded the total income; hence, a net loss for the period. 
The balance in the Profit and Loss account should always 
correspond with the amount of net profit or net loss shown in 
the completed work sheet and in the statement of income, 
profit and loss. 

The amounts in the profit and loss column of the work 
sheet serve two purposes. First, they are used to prepare the 
statement of income, profit, and loss. In the second place, 
the same amounts are used to prepare the closing entries. 
Thus, the figures from the same source are used in both the 
income, profit and loss statement and the Profit and Loss 
account. 

The Profit and Loss account, however, must not be confused 
with the income, profit and loss statement. While both the 



CLOSING THE OPERATING ACCOUNTS 



181 



account and the statement show the same net profit or net loss, 
they serve different purposes. The statement is prepared in 
regulation form from which analyses may be made by the engi- 
neer for the, management. The Profit and Loss account is a 
summary of all the operating accounts for the purpose of a 
permanent record in the ledger of the net profit or net loss for 
each fiscal period. The Profit and Loss account may be 
likened to a funnel, into which enter all income and expense 
accounts, and out of which emerges the final net profit or net 
loss. The account is never used for any purpose other than a 
summary. It is used only at the close of the accounting 
period. No postings should ever be made to the account 
between any two closing dates. 

7. Closing the Profit and Loss Account. 

A credit balance in the Profit and Loss account signifies 
a net profit for the period. This means an increase in owner- 
ship from operation of the business. Continuing the same 
illustration already used in this chapter, the entry to close the 
Profit and Loss account is shown below : 

General Journal 



19 
















June 


30 


Profit and Loss 




$1,162 


74 










C. R. Kehoe, Capital 








$1,162 


74 






To close the net profit for the 
















fiscal period to owner's Capital 
















account. 













Profit and Loss 





Total Expense 




$19,571 


76 






New Inventory 




$ 2,650 


00 




Net Profit to Capi- 












Total Income 




18,084 


50 




tal 




1,162 


74 




















$25,734 


50 










$20,734 


50 











A debit balance in the Profit and Loss account means an 
operating loss for the period with a corresponding decrease in 
ownership. The closing entry would be as follows, if the net 
loss for the period had been $650.00. 



182 



COST FINDING FOR ENGINEERS 

General Journal 



19 



Owner's Capital 
Profit and Loss 

To close the net loss for the fiscal 
period to owner's Capital account. 



$650 



00 



$650 00 



8. Closing the Owner's Personal Account. 

A debit balance in the Owner's Personal account denotes 
withdrawals of capital during the fiscal period. Obviously, 
the owner's Capital account would be overstated if the debit 
balance were not transferred to it from the Personal account. 
Using the illustration in this chapter again, the entry would 
be as follows : 

General Journal 



19 
June 



30 



C. R. Kehoe, Capital 
C. R. Kehoe, Personal 
To close the owner's withdrawals 
to the owner's Capital account - 




$400 


00 


$400 


00 



9. Ruling Off the Operating Accounts. 

After the closing entries have been posted, no balance 
exists in the operating accounts. To arrange these accounts so 
that the postings for the next fiscal period will be separate from 
the postings of the present period, the accounts are ruled off as 
follows: 



-Sales 



19 












19 












June 


30 


To Profit and 


J20 






Jan. 


31 


Sales Journal 


817 


$ 3,150 


70 






Loss 




$16,760 


00 


Feb. 


28 





S20 


2,800 


22 














Mar. 


31 


i 


S22 


2,661 


37 














Apr. 


30 


" * 


S25 


2,542 


85 














May 


31 


i< i 


S99 


2,630 


05 














June 


30 


M 4 


S32 


2,974 


81 










$16,760 


00 










$16,760 


00 























CLOSING THE OPERATING ACCOUNTS 



183 



10. Preparing a Proof Trial Balance. 

This is the final stage in each accounting cycle. After the 
balances in the operating accounts have been closed to the 
owner's Capital account, only the asset, liability, and owner- 
ship accounts remain open in the ledger. 

The capital accounts in the ledger of the C. R. Kehoe 
illustration after closing are as follows: 



Cash 



$400.00 



Notes Receivable 



$200.00 



Accounts Receivable 



$7,000.00 



Merchandise Inventory 



Jan. 1 



$2,300 00 



June 30 $2,650.00 



June 30 To 
Profit and 
Loss 



$2,300 00 



Furniture and Fixtures 



$500.00 



Accounts Payable 



$1,500.00 



C. R. Kehoe, Personal 



C. R. Kehoe, Capital 



19- $400.00 


To Capital $400. 00 June, 30 


Jan. 1 






Personal $ 400.00 


Balance 


$8,580,00 




June 30 


June 30 






Balance 9,342 74 


Profit 


1,162 74 




$9,742.74 




$9,742 74 






June 30 








Balance 


$9,342.74 



Office Supplies Inventory 



$40.00 



Prepaid Rentals Received 



$805.00 
June 30 Balance 35.00 



$S40.00 



$840.00 



$840.00 



June30Balanct$35.00 



184 COST FINDING FOR ENGINEERS 

Prepaid Insurance Reserve for Taxes 





$240.00 


June 30 
Insurance 
June 30' Bal. 


$ 80 00 
160 00 


June 30 $16.76 


$240.00 


$240.00 


June 30 
Balance 


$160.00 





Wages Accrued (Payable) 



Commissions Accrued (Receivable) 



June 30 



$75.00 June 30 



$19.50 



Any capital account with more than one debit or credit 
posting should be balanced and ruled as illustrated in the 
Prepaid Insurance account. By so doing the same figure is 
shown in the account which appears in the balance sheet 
column of the work sheet and in the balance sheet itself. 

The purpose of the proof trial balance is to prove that the 
ledger is in balance a/ter the process of closing has taken place. 
It should be prepared before any transactions are recorded 
which are applicable to the next fiscal period. The proof 
trial balance has the same form as the trial balance before 
closing. A proof trial balance of the C. R. Kehoe ledger is 
taken from the preceding accounts as listed below; 

FORM 37 

PROOF TRIAL BALANCE 
C. R. KEHOE 
June 30, 19 



Cash 


$ 400 . 00 




Notes Receivable 


200 . 00 




Accounts Receivable . . 


7,000 00 




Merchandise Inventory 


2,650.00 




Furniture and Fixtures 


500.00 




Accounts Payable 




$ 1,500.00 


C. R. Kehoe, Capital 




9,342.74 


Office Supplies Inventory 


40.00 




Prepaid Rentals Received 




35 00 


Prepaid Insurance 


1GO.OO 




Reserve for Taxes 




16.76 


Wages Accrued 




75.00 


Commissions Accrued 


19 50 












$10,969.50 


$10,969.50 



CLOSING THE OPERATING ACCOUNTS 185 

The proof trial balance portrays the existence of the owner- 
ship equation just the same as the balance sheet. This is 
true because all income and expense items have been closed 
into the owner's Capital account. The proof or post-closing 
trial balance differs from the balance sheet only as to form 
and purpose; the accounts and amounts are identical. 

Questions 

1. Enumerate the major activities taking place from the beginning 
through to the close of the fiscal period. 

2. What is meant by "closing the operating accounts?" 

3. How frequently are the operating accounts closed? 

4. Is it necessary to close the operating accounts in order to ascertain 
the profit or loss from operations? 

5. What are the purposes of closing the operating accounts? 

6. Enumerate the steps involved in closing the operating accounts. 

7. What part is played by the adjusting journal entries in closing the 
operating accounts? 

8. What is the procedure in closing the income accounts? The 
expense accounts? 

9. What is the function of the Profit and Loss account? 

10. After all operating accounts are closed, will there be a debit or a 
credit balance in the Profit and Loss account? 

11. What entry is necessary to close the Profit and Loss account? 

12. Contrast the Profit and Loss account with the income, profit and 
loss statement. 

13. What is the relationship between the Profit and Loss account 
and the profit and loss column in the work sheet? 

14. What is the purpose of a proof trial balance? 

15. Compare the proof trial balance with the balance sheet. 



PART II 
BASIC VALUATION PRINCIPLES 

CHAPTER XII 
CAPITAL VERSUS OPERATING EXPENDITURES 

1. The Distinction between Capital and Operating Accounts. 

The twofold classification of accounts again comes to the 
front for consideration. The classification has been considered 
already as a basis for sorting the proper accounts to prepare 
the balance sheet and the statement of income, profit and 
loss. The capital accounts are used in the preparation of the 
balance sheet. They are the assets, liabilities, and ownership 
which set forth the salient facts in regard to the financial con- 
dition of the business. The income, profit and loss statement 
is prepared from the operating accounts. These accounts 
record the transactions, showing the revenue received as well as 
the expenses incurred in obtaining the revenue. 

The distinction between capital and operating accounts is 
sometimes referred to as the difference between capital and 
revenue accounts. On the books there is no difference in 
appearance between the two types of accounts, with the excep- 
tion as to the name of the account. But a sharp distinction 
must be made between the two groups at all times in regard 
to their nature, when accounting processes are involved. 
These processes are divided into two periods, namely, when 
transactions are journalized and when accounting statements 
are prepared. 

It is tremendously important to realize and understand the 
distinction between a capital and a revenue expenditure at 
the time the transaction is journalized in a book of original 
entry. There is a fundamental difference between an expend- 
iture for the purchase of an asset and an expenditure in 
connection with the maintenance of the same asset. If the 
importance of the distinction is realized, the proper account 

186 



CAPITAL VERSUS OPERATING EXPENDITURES 187 

will be charged with the cost at the time of the transaction. 
Little danger lurks, then, in getting the item in the statement 
in which it does not properly belong. A transaction correctly 
handled in the beginning offers little or no trouble at the close 
of the accounting period. When accounting statements are 
prepared, it is always important, however, to have knowledge 
of the fact that the proper items have been incorporated 
in the balance sheet and in the income, profit and loss 
statement. 

The result of charging capital or operating accounts erro- 
neously is to misstate the net profit or net loss for the period. 
Obviously, such an error would be reflected in the ownership 
account. If a capital expenditure is actually made and it 
is charged to an expense account, the effect is to understate 
the asset values and profits, while expense is overstated. If 
an operating expenditure is actually made and it is charged 
to an asset account, asset values and profits are overstated 
while the expenses are understated. 

2. Capital and Operating Expenditures. 

Decisions must be made frequently by the engineer pertain- 
ing to the transactions the nature of which makes it quite 
difficult to say whether a capital or an operating account 
should be charged. Certain well-defined rules may be stated 
to aid in properly classifying the expenditure. Even with a 
knowledge of these rules, however, proper classification may 
be difficult to determine. For an example use the following 
illustration: A new delivery truck was purchased in Feb- 
ruary. In April of the same year the name of firm, address, 
and other advertising matter was painted on the truck at a 
cost of $50. Should this cost be treated as an operating 
expense or should it be capitalized ? While it is true that the 
firm will receive the benefit from the advertising as long as it 
uses the truck, has such advertising actually increased the 
value of the truck? Many large business concerns combat 
such dilemmas by setting an arbitrary figure above which 
debatable items are capitalized and below which they are 
treated as operating expenditures. In case of absolute 
doubt as to the proper classification of the expenditure, it is 
better to charge an operating account instead of a capital 
account. By so doing conservative accounting practice is 



188 COST FINDING FOR ENGINEERS 

adhered to; profits will be understated rather than 
overstated. 

Capital expenditures are those expenditures which increase 
the relatively permanent values or the productivity of an asset. 
Expenditures made for items which will be in use or possess 
value for a period of time longer than one accounting period 
should be capitalized. When a piece of machinery is pur- 
chased it will last, normally, more than one year. Its cost 
value is said to be capitalized, and it is termed a " fixed asset. " 
Through the process of depreciation, the cost is charged into 
the operating expenses during the years that it remains in use. 
If the accounting period or fiscal year was 5 years in length, 
and the machine had an estimated life not exceeding 5 years, 
then the expenditure could be considered as an operating or 
revenue expenditure. As accounting or fiscal periods never 
exceed 12 months, however, any expenditure made which 
creates a value giving benefit for a longer period of time must 
be considered as a capital expenditure. Capital expenditures 
may be classified as additions, betterments, extensions, 
improvements, replacements, and renewals. 

Revenue expenditures are those expenditures which do not 
increase the value or productivity of any fixed asset. In 
contrast to capital expenditures, revenue expenditures repre- 
sent current operating costs, which are also known as " operat- 
ing expenditures. 7 ' Expenditures of this type confer a benefit 
to the business during only one fiscal period. If the operating 
expenditures conferred a benefit to more than one accounting 
period, the cost would be capitalized. This is frequently the 
case with certain expense items such as expenditures made for 
insurance, advertising literature, fuel, factory and office 
supplies, etc. If it can be ascertained at the time the expend- 
iture is made that it will benefit more than one fiscal period, 
then the expenditure should be charged to a "prepaid" 
expense account. Salaries, wages, taxes, insurance, fuel, 
power, and rent are illustrative of the operating expenditures. 
Such expenditures are sometimes termed "revenue" expend- 
itures because they are costs of obtaining the revenue or 
income. Expenditures for repairs, maintenance, costs of 
production, marketing, and administration are also treated as 
operating expenditures. The last three types of expenditures 
are described in Part IV. 



CAPITAL VERSUS OPERATING EXPENDITURES 189 

3. Additions and Extensions. 

Expenditures for additions and extensions are capital in 
nature. Such expenditures give the already existing fixed asset 
values an added physical value which they did not previously 
possess. The additions represent the value expended for 
capital assets which have not replaced any asset already in 
existence in the business. Additions may be made to land, 
buildings, machinery, or any other type of equipment. 

4. Improvements and Betterments. 

Improvements and betterments to fixed capital assets 
represent capital charges. Such expenditures are made for 
the purpose of improving the physical value or the productiv- 
ity of the fixed assets. The application of safety devices to 
machinery or other equipment illustrates an improvement. 
The improvement safeguards the workmen from injury as 
long as the fixed asset is in use; therefore, the cost should be 
capitalized. The application of some patented device to a 
piece of machinery would be classed as a betterment, since it 
will increase or facilitate production. 

5. Replacements. 

When a fixed asset has become obsolete or depreciated to a 
point where it is no longer an economical productive agent, 
and a new unit is purchased to take its place, a replacement has 
been made. Replacements represent capital expenditures. 
In Chap. VIII several illustrations of journal entries were 
shown when depreciated assets are replaced by new units. 

Replacements constitute an exchange of units which are 
substantially equal in value. If the new unit, because of 
increased productivity, has a much higher cost value than the 
one it replaced, the additional cost is capitalized as a better- 
ment. When a fixed asset is replaced, the cost of the replace- 
ment is capitalized regardless of whether its cost is greater or 
less than the original cost of the asset being replaced. 

Small parts of an individual unit of equipment often must be 
replaced several times before it is necessary to replace the 
complete unit. Expenditures of this type do not represent 
capital outlay. They are to be considered as repairs or 
maintenance. 



190 COST FINDING FOR ENGINEERS 

6. Renewals. 

Renewals are capital expenditures usually made in con- 
nection with intangible assets. The costs of obtaining 
extended franchises, copyrights, etc., are considered as renewal 
costs from a technical accounting viewpoint. Renewals 
should not be confused with replacements or repairs. While 
it is true that a fixed asset may be considered as being renewed 
when it replaces a complete existing unit, accounting termi- 
nology, strictly applied, classifies the new unit received in the 
business as a replacement. When a new earn is placed in a 
machine or a new carburetor is installed in an automobile, 
the application may be loosely spoken of as a renewal, but 
strictly speaking it is a repair. The application of either item 
does not increase the original estimated life of the asset to any 
material degree; therefore, the cost should be classified as a 
repair. 

7. Repair 

Repairs are treated as operating expenditures. They do 
not increase the value of the asset upon which they are made. 
Repairs are necessary to keep buildings and equipment in 
condition to operate efficiently. Through wear and tear, 
lapse of time, or accident, certain parts of any capital asset 
must be renewed from time to time. The expenditures 
involved in endeavoring to keep physical assets in the 
maximum degree of efficiency during their life are considered 
repairs. Two general methods are practiced in charging 
repairs as a revenue expenditure. One way is to charge the 
the cost of repairs at the time they are actually made. The 
other method is to anticipate the annual charge and cost each 
month with a proportionate part of the cost. Chapter IX 
describes the method of handling the Repairs Reserve account. 

Another classification of repairs is sometimes made, known 
as " extraordinary repairs/' Repairs of this nature tend to 
lengthen the original estimated life of the asset affected. 
While some accountants advocate charging the Depreciation 
Reserve account for the cost of extraordinary repairs, another 
practice appears to have more merit. The Depreciation 
Reserve account should be charged only when an asset is 
replaced, and then only for that amount of depreciation which 
has been credited to the Reserve account which is applicable 



CAPITAL VERSUS OPERATING EXPENDITURES 191 

to the asset being replaced. Orthodox accounting practice 
would seem to be more strictly adhered to if the cost of extra- 
ordinary repairs were capitalized and charged off over the 
remaining life of the asset involved. 

8. Maintenance. 

Maintenance constitutes an operating expense. It is a 
broader term than repairs and usually covers the entire 
operating cost for some particular activity, service, or group of 
equipment. Thus, there may be maintenance accounts for 
real estate (company houses owned by a coal mining concern) ; 
machine shop maintenance; and maintenance of plant pro- 
duction centers. Maintenance includes repairs, cost of 
supplies, repairmen's wages, oiling, and all other costs of 
the upkeep of certain specific fixed assets. Specifically, the 
account, Boiler Maintenance, may include such costs as 
material and labor for repairs, cost of washing out the boiler 
periodically, and inspection costs. 

9. Capitalized Operating Expenditures. 

Certain expenditures arise from time to time the nature of 
which characterizes them as strictly operating expenditures 
from two points of view. The expenditure neither increases 
the value of an asset, nor does it increase the productivity of 
an asset. Regardless of these facts, certain pure expense items 
are capitalized. The reason for capitalizing these expense 
items arises when the expenditure benefits more than one 
accounting period. If this is the case, the entire cost is not 
charged as a cost of operations in the period in which the 
expense is incurred. The cost is set up as a deferred charge to 
operations, and a portion is charged off over a period of years, 
the number being determined by the facts involved. Cap- 
italizing an operating expenditure, thus, is equivalent to treat- 
ing an expense as a temporary asset. Some expenditures 
coining under this classification are the following: 

1. Cost of moving business from one location to another 
place. 

2. Cost of rearrangement of plant equipment to facilitate 
production flow. 

3. Cost of making repairs and improvements on landlord's 
property. 

4. Cost of experimental and development expenses. 



192 COST FINDING FOR ENGINEERS 

Some other items which neither increase asset values nor 
represent operating expenditures, which are capitalized to be 
treated as deferred charges, are as listed below: 

1. Organization expenses of a corporation. 

2. Undepreciated cost of fixed assets which have become 
obsolete. 

10. Aids in Differentiating between Capital and Operating 
Expenditures. 

Certain tests may be applied which will help to determine 
the nature of the expenditure. 

1. If the expenditure is one that increases the relatively 
permanent values in the business, it is a proper charge to 
capitalize. 

2. If the expenditure in connection with the asset will 
increase the productivity or output, it is a proper charge 
to capitalize. 

3. If the expenditure incurred has been merely to maintain 
an asset at its maximum degree of efficiency, it is a proper 
charge to operations. 

4. If the value received from the expenditure does not 
extend over more than one accounting period, usually one 
year, it should be considered as an operating expenditure. 

5. If the expenditure is in the nature of an operating 
expense, but circumstances warrant spreading the expense 
over a period of 2 or more years, then the expense should be 
capitalized and considered as a deferred charge to operations. 

Questions 

1. What is the importance of being able to distinguish between a 
capital account and an operating account? 

2. What is meant by the term " capitalizing an expenditure?" 

3. What is considered an operating expenditure? 

4. What condition results if a capital expenditure is treated as an 
operating expenditure? 

5. Describe what is meant by an addition. 

6. Contrast an addition with an improvement or a betterment. 

7. Explain what is meant by a replacement. 

8. What is a renewal? 

9. Repairs are considered what type of an expenditure? Why? 

10. Contrast ordinary repairs with extraordinary repairs. 

11. Describe what is meant by maintenance. 

1 2. When is it considered proper to capitalize an operating expenditure ? 

13. State the various tests which may be used to determine the differ- 
ence between a capital and an operating expenditure. 



CHAPTER XIII 
THE VALUATION OF CURRENT ASSETS 

1. The Importance of Current Asset Valuation. 

The principles of valuation pertaining to current assets are 
important because they affect profits. As the inventories and 
accounts receivable are valued, a direct reflection is evident 
in the final net profit or net loss. It may be clearly seen, 
therefore, that unwarranted overstatement or understate- 
ment of current asset values vitiates operating results. The 
engineer is interested in current asset valuation since it 
relates to operating results. Especially is he interested in 
inventory valuation, because of its direct influence upon 
gross and net profits. 

2. The Distinction between Current and Fixed Assets. 

The distinction between current and fixed assets has been 
dwelt upon already, but it is important to emphasize it again. 

A current asset represents any personal property owned by 
the business in the form of cash, or that which will be converted 
into cash within a relatively short period of time. This 
usually means that the conversion into cash will take place at 
least within one year from the date the balance sheet is 
prepared. 

A fixed asset represents either personal or real property 
owned by the business, which has been acquired for the pur- 
pose of facilitating the operation of the business and without 
which the business could not function properly. Fixed assets 
are not purchased for immediate resale, although they may 
be sold, exchanged, or scrapped after their period of usefulness 
to the business has ceased. 

3. A Current Asset Classification. 

The following classification, while not complete, gives the 
most common groups of current assets found in the majority 
of businesses. 

193 



194 COST FINDING FOR ENGINEERS 

CHART 5. CLASSIFICATION OF CURRENT ASSETS 
a. Cash 



1. Liquidating. 



2. Working. 



b. Notes receivable 

c. Accounts receivable 

d. Accruals receivable 

a. Inventory raw materials 

b. Inventory work in process 

c. Inventory finished goods 



d. Inventory finished parts 

e. Inventory consigned goods 

(a. Readily marketable stocks 
b. Readily marketable bonds 
c. Readily marketable mortgages 
a. On purchase contracts 



4. Advances. 



6. To traveling representatives 



c. To officers and employees 

d. To subsidiaries 

(a. Petty cash fund 

b. Change fund 

c. Branch working fund 

The liquidating assets are made up of accounts receivable, 
notes receivable, and accruals receivable. As these assets 
are converted into cash, the proceeds are used to settle items 
of indebtedness as for example, payrolls, accounts payable, 
and taxes. 

The working assets are the inventories which go to make 
up the saleable product. They cover raw materials, work in 
process, finished parts, fininshed goods, and include even goods 
out on consignment. 

Temporary investments constitute a group of readily market- 
able securities in which surplus cash has been invested. 
Some types of business establishments deal in the manufacture 
and sale of seasonable commodities. During off-season 
production the cash not needed for current operations is 
invested in stocks, bonds, or mortgages which may be sold on 
the market at any time. 

The current assets listed above comprise the working 
capital of the business, as described in Chap. X. For credit 
purposes, temporary investments are usually not included 
as a quick asset. " Quick assets " is a more restricted term 
than " current assets " and generally refers to assets which 
can be converted into cash without any appreciable loss. 
Securities may be readily marketable, yet the market may be 



THE VALUATION OF CURRENT ASSETS 195 

down when it is desired to dispose of them, resulting in a 
loss if sold. 

Advances are treated as current assets because they are cash 
items. Advances may or may not be considered as working 
capital, dependent upon the point of view. From the stand- 
point of production, advances may be considered as working 
capital, because they are made for the purpose of facilitating 
manufacturing activities. Credit agencies are sometimes 
loathe to consider advances as a part of working capital, 
especially when advances are made to officers, employees, and 
subsidiary companies. This attitude prevails because the 
two latter types really represent loans receivable, and fre- 
quently remain on the books for an indefinite period of time 
instead of being converted into cash within a relatively 
short period. 

Special funds are of two types, namely, current and relatively 
permanent. Special funds of the first type are for petty cash, 
store change, or branch working funds. All three of these 
funds are considered as working capital, and appear on the 
balance sheet immediately following the general cash. Rela- 
tively permanent special funds are classified under the fixed 
asset group. 

How to value accurately the various current assets must 
now be considered. Errors in the valuation of these assets 
can creep in so easily, errors which will affect profits and 
losses, that the greatest of care must be exercised by engi- 
neers and accountants in valuation procedure. Let us take 
up the valuation of each of the current assets in detail. 

a. Cash. 

At first thought it would seem that there would be no valua- 
tion problem in connection with cash. Usually there is not, 
unless the cash on hand includes "I. 0. IPs" from the officers 
and employees. Such items should always be considered as 
accounts receivable from officers and employees; never as 
cash. The item of cash in the balance sheet should represent 
only currency, coin, money orders, bank drafts, and checks on 
hand or in the bank. 

6. Notes Receivable. 

The chief principle of valuation in connection with notes 
receivable is to make sure that the amount includes only 



196 COST FINDING FOR ENGINEERS 

unmatured notes. If a note is not paid at maturity it is said 
to be dishonored. As such, it ceases to be a bona-fide asset as 
a note receivable, and should be transferred to the customer's 
account, together with any accrued interest and protest fees. 
In this manner a valuable credit reference is set up in the 
customer's account for future use. A dishonored note is 
held in the customer's account until payment is received or 
until it is charged off as an uncollectible account. Only the 
notes receivable at face value unmatured should appear in 
the balance sheet, and any discounted notes receivable should 
be deducted from the total of notes receivable unmatured. 

c. Accounts Receivable. 

When goods are sold on credit terms, it is inevitable that 
losses will occur from customers' accounts. Through bank- 
ruptcy, deliberate fraud, or other reason, some customers 
will never pay the amounts they owe. The amount of accounts 
receivable shown in any balance sheet will not be the amount 
of cash ultimately collected; therefore, the value placed on 
them can be only an estimate. The value of the estimated 
good accounts receivable is determined after deducting the 
amount set up as a credit in the account, Reserve for Uncollec- 
tible Accounts. Amounts which have been due from cus- 
tomers for a period of over one year are usually written off or 
are charged against the reserve for uncollectible accounts. 

d. Accruals Receivable. 

There is no particular problem pertaining to this type 
of asset. Commissions, rents, interest, etc., owing to the 
business may be computed with accuracy when all facts are 
known. Their value appears on the balance sheet in accord- 
ance with the amount due at the closing date. 

e. Raw Materials Inventory. 

Inventory valuation is one of the most important principles 
with which the accountant and engineer have to deal. It is 
important because of the investment involved, and because 
of its direct relation to profits. 

The investment in raw materials should be kept at a min- 
imum, while at the same time production must not be handi- 
capped by shortages. If a too large stock of raw materials 



THE VALUATION OF CURRENT ASSETS 



197 



is carried, some of the items may become obsolete. This 
makes it necessary to scrap the material before it can be used. 
Again, the investment in raw materials should be kept as 
low as possible without jeopardizing production, in order that 
a higher rate of stock turnover may result. The larger the 
inventory turnover the greater is the return upon a given 
capital invested. One of the fundamental principles of 
management is to buy raw materials on the basis of main- 
taining one month's supply on hand in advance of the manu- 
facturing requirements. The only deviations which should 
alter this rule are in event of an anticipated market shortage 
or an anticipated rise in price. The practice is becoming more 
common to order a year's supply of certain stock items to 
obtain favorable prices, the liability for the goods arising 
only as release orders for shipments of specified amounts are 
made by the buyer. 

The volume of raw materials on hand may affect indirectly 
the value of the inventory. If excessive stocks are acquired 
and obsolescence occurs, or market prices decline, then it is 
not considered within the limits of conservative accounting 
practice to value the inventory at cost. Cost or market, 
whichever is the lower, is the valuation principle generally 
followed. Cost means the invoice price paid to the vendor 
at the time the goods were purchased. Market means the 
price that would be paid for the goods on hand, at the time 
of taking the inventory, if the goods were to be purchased in 
the open market. If the market value of raw materials, 
however, is lower than the cost value, then the cost figure 
should be used as the closing inventory value in the state- 
ment of the cost of production, in order to prevent the 
cost of production and net profit from being overstated. 
The decrease in inventory value should be handled as a charge 

General Journal 



19 



Loss Due to Decline in Market Value of 
inventory (Profit and Loss) 
Inventory 

To write down the cost value 
of inventory to the market value 
of same. 



$2,867 



00 



$2,867 



00 



198 COST FINDING FOR ENGINEERS 

directly to Profit and Loss account and a credit to the Raw 
Material Inventory account (see Chap. XXV for illustra- 
tion), as provided for by the general journal entry shown on 
page 197. 

Posting of the adjusting entry reduces the inventory to 
the market value in the ledger account, which value is then 
shown in the balance sheet. Expected future declines in 
the cost value of raw materials, which have not actually taken 
place, should be provided for by a surplus reserve, as described 
in Chap. IX. 

/. Work in Process Inventory. 

The work in process inventory probably offers the least 
problem of all inventories in respect to valuation in a going 
concern having facilities for adequate cost findings. There 
are three main principles to remember: first, the raw mate- 
rials charged into production v should be priced correctly; 
second, the direct labor charges to work in process should be 
accurate; third, the overhead expense charges should not 
include any items which are not strictly of a manufacturing 
nature. If these three principles are complied with, the 
work in process inventory will be stated at cost, which is 
generally the value used. The span of time required to process 
goods is usually so short that no appreciable difference 
exists between the cost of the raw material charged to pro- 
duction and its present market value. 

g. Finished Goods Inventory. 

Finished goods inventory may be composed of either 
merchandise purchased for resale or manufactured goods. 
If the finished goods inventory is composed of units purchased, 
the cost value is used in preparing the accounting statements, 
unless the market value happens to be lower. In case the 
market value of the inventory is lower than the cost value, 
the cost value is shown in the cost of goods sold section 
of the statement of profit and loss, and the market value is 
used in the balance sheet. A finished goods inventory com- 
posed of units produced by a manufacturing plant uses the 
unit cost of production in valuing the inventory, except where 
the market value of the goods is lower, in which case the two 
different values are treated the same as in the case of 
purchased units. 



THE VALUATION OF CURRENT ASSETS 199 

An illustration will show why it is more conservative to 
make use of cost or market, whichever is the lower inventory 
value, when preparing the profit and loss statement : 

Case 1 Case 2 

Net Sales $116,989 ' $116,989 

Cost of Sales: 

Inventory, Jan. 1, 19 $17 ,950 $17 ,950 

Net Purchases 73,810 73 .810 

Goods Available for Sale $91,760 $91,760 

Inventory, Dec. 31, 19 16,893 (cost 14.026 (market 

value) value) 

Cost of Sales 74,867 77,734 

Gross Profit $ 42, 122 $ 39,255 

Marketing and Administrative 

Expenses 36,019 36,019 

Net Profit $ 6,103 $ 3,236 



It is seen that net profit is less when the closing inventory 
of lesser value is used. And this is rightly so, because the 
loss should be taken in the year w r hen the decline in market 
value actually occurred. There is a law in economics which 
holds that a decline in selling prices usually follows a decline 
in wholesale prices. This means that sales for the following 
period, using the above illustration, will reflect the market 
decline through a lower selling price per unit. If the cost 
value of the closing inventory is used when the market value 
is lower, the net profit is overstated for the year in which 
the decline occurred and understated in the following year. 
This is clearly shown in the following illustration: 

Case la Case 2q 

Net Sales $110,608 $110,608 

Cost of Sales: 

Inventory, Jan. 1, 19 $16,893 (cost $14,026 (market 

value) value) 

Purchases 69.590 69,590 

Goods Available for Sale $86 , 483 $83 ,616 

Inventory, Dec. 31, 19 15,291 (cost 15,291 (cost 

value) value) 

Cost of Sales $ 71.192 68.325 

Gross Profit $ 39,416 $ 42,283 

Marketing and Administrative 

Expenses 36,847 36,847 

Net Profit $ 2,569 $ 5,436 



Over the period of the two years the net profit will be 
adjusted even though the principle of using cost or market 
value, whichever the lower, is not adhered to in the year in 
which the decline occurred. This fact is shown by adding the 



200 COST FINDING FOR ENGINEERS 

net profits for the two years under cases 1 and la, also under 
cases 2 and 2a above. But the important thing is to state the 
net profit accurately in each year. Besides conforming with the 
above principles and thus with conservative accounting prac- 
tise, accuracy of net profit statement for each specific year 
conforms with Federal income tax requirements. 

The manner in which the inventory problem should be 
handled properly is next developed. If the market value 
($14,026) is used in arriving at the cost of sales, as shown in 
Case 2, the real cost of sales is overstated and the true gross 
profit is understated. The cost value of the inventory 
($16,893) should bemused as shown in Case 1, in order to show 
correctly the value of the cost of sales and the gross profit. 
Then, in order to reflect the inventory loss of $2,867 ($16,893 - 
$14,026) in the net profit, the loss should be deducted from 
the net operating profit, ($6,103 in Case 1). This deduction, 
then, will reduce the net operating profit to $3,236, the same 
amount as shown in Case 2. In the following year, the state- 
ment of profit and loss would be prepared as shown in Case 2a. 

h. Finished Parts Inventory. 

Manufacturing concerns frequently make some of the 
smaller parts used in the production of their commodities. 
Where this occurs, an order is prepared within the plant 
calling for the production of so many Units of the finished part. 
Accurate cost of the total number produced not only shows 
whether it is more profitable to make them or to buy them in 
the open market, but it also furnishes a cost figure to use for 
inventory valuation. Finished parts, like other inventories, 
ordinarily should be priced at cost or market whichever is 
the lower. 

i. Consigned Goods Inventory. 

Manufacturing concerns sometimes market their products 
by shipping the goods to a commission broker. Such a ship- 
ment is termed a " consignment." The broker or jobber 
acts as the agent of the shipper or consignor, and disposes of 
the goods if he can. Any goods which the agent cannot sell 
are returned to the consignor. When goods are consigned, 
the title to them does not pass to the consignee with delivery, 
as is the case with an ordinary sale. The value of the unsold 



THE VALUATION OF CURRENT ASSETS 201 

goods in the hands of any consignee, therefore, represents 
a current asset of the consignor. 

At the time of closing, the balance sheet should reflect 
the unsold consigned goods in the hands of all the consignees 
at cost or market, whichever is the lower. Reports received 
from the consignees, termed "account sales," show the amount 
of sales made and the inventory on hand. Account sales are 
rendered by the consignee after all goods on the consignment 
have been sold, and at the close of each monthly period of the 
consignor, in order that the latter will know the inventory 
value. 

4. Exceptional Methods of Valuing Inventories. 

From the foregoing it must not be inferred that either 
cost, or cost or market whichever is the lower, are the only 
methods of valuing inventories. While they are the most 
common methods, others may be employed in exceptional 
cases. Any deviation should be clearly shown, however, if the 
inventory value is stated in the financial statements at any 
other value than cost, or cost or market, whichever is the 
lower. 

Robert H. Montgomery, an authority on accounting, 
describes exceptional inventory valuation methods in the 
following manner: 

1. When is it proper to value inventories at less than either cost 
or market? . . , The selection of a low, fixed base price for raw mate- 
rials is a practice which was adopted many years ago and is now in 
use by some of the most successful and far-seeing business men. 
(In most cases the result is reached by valuing inventories at cost or 
market and creating a special account to record variations between 
that valuation and the fixed base price.) There must be some direct 
connection between good business practice and good accounting 
practice . . . Good business concerns have good cost systems, but 
when market conditions change it may be folly to expect to realize 
cost. Good accounting practice must not be confused with good 
accounting methods. The latter will produce accurate costs by 
means which are largely mechanical and inflexible. Good account- 
ing practice is based on opinion and therefore is flexible. 1 

2. When is it proper to value an inventory at cost, if that is higher 
than replacement cost? ... In the case of manufacturing concerns, 
when replacement cost is less than the actual or original cost of the 

1 " Auditing Theory and Practice/' 4th Rev. Ed., p. 181. 



202 COST FINDING FOR ENGINEERS 

goods in the inventory, the inventory should be reduced to replace- 
ment cost. When reproduction cost is more than apparent market 
or replacement prices, it might appear, and it is urged that there is 
some justification for valuing the inventory at reproduction cost 
when it is believed that market prices are unduly depressed, that 
considerable quantities cannot be purchased at the apparent market 
prices, and that the inexorable law of supply and demand will in 
time raise the market prices to something above cost of production. 1 

3. When is it proper to value an inventory at market, if market is 
higher than cost? ... If there is no intention to write down values 
arbitrarily, and if balance sheets purport to exhibit actual values, as 
nearly as can be determined, of all assets shown therein, it is obvious 
that the rule of "cost or market, whichever is lower " renders impossi- 
ble a true and accurate balance sheet whenever market values sub- 
stantially exceed cost. It is possible to be conservative and at the 
same time prepare a balance sheet which will disclose not hide 
favorable changes in market values. 2 

4. When is it proper to value an inventory at selling prices? . . . 
In every case when inventory items are carried on a balance sheet 
without explanatory comment, those who use the balance sheet are 
justified in assuming that no profit whatever appears in the item, and 
that, if there has been a decline in values, the decline has been fully 
reflected. But if the inventory is clearly shown to be at selling 
prices, the chief cause for criticism has been removed. There may 
be anticipation of profits but there is no deception. If there is a 
good reason for this basis of value, the other objections are likewise 
removed. 3 

6. Temporary Investments. 

Investments of this type should be valued at cost. No 
attempt should be made to reflect on the books the fluctua- 
tions in the market value of the securities. By showing the 
securities at cost, the net gain or net loss arising from their 
sale may be easily calculated. Until they are sold, no gain 
or loss has been realized, and an attempt to record the present 
market value on the books would be to show a gain or a loss 
which has not actually occurred. 

At the time of preparing the balance sheet, if the market 
value of the securities varies to a material degree from the 
cost, a notation may be made to call attention to the fact. 
An asterisk may be placed preceding the security cost value 

1 "Auditing Theory and Practice," 4th Rev. Ed., p. 189. 

2 "Auditing Theory and Practice," 4th Rev. Ed., p. 190. 
1 "Auditing Theory and Practice," 4th Rev. Ed., p. 193. 



THE VALUATION OF CURRENT ASSETS 203 

which calls attention to a footnote in the balance sheet, 
explaining what the market value is at the time. 

6. Advances. 

The chief problem of valuation in connection with advances 
is to know whether or not the stated amounts actually repre- 
sent asset values. Advances on purchase contracts can seldom 
be questioned as a working capital value. Advances to 
subsidiary companies usually represent working capital. 
Occasionally the advance may not be repaid for a number of 
years after it has been made. If the advance is made for a 
long period of time, that is for several years, it is then con- 
sidered as a permanent investment. 

Advances to traveling representatives should reflect the 
net amount unexpended for expenses. At the time of closing, 
expense reports should show the total unexpended advances, 
which rightly represent a current asset at that date. 

An advance to officers or employees while theoretically 
a current asset actually proves to be a long-term loan in many 
cases. It is a current asset in that it represents a receivable, 
but again it is not a current asset or a part of working capital, 
if the advance remains unpaid year after year. The practice 
of carrying unpaid advances for a long period of time reflects 
poor financial management. 

7. Special Funds. 

There is no peculiar problem of valuation if the fund is 
composed of cash only. And this is the case with all funds 
classified under the current asset group. The chief principle 
is to be certain that the value stated in the balance sheet 
represents cash only. That such condition may not exist may 
be understood clearly when the nature of the petty cash 
fund is revealed. 

Every business establishment has many small cash pay- 
ments to make for such items as street car fares, supper money 
to office employees, donations to charitable institutions, 
parcel-post charges, and other expenses of a minor or petty 
nature. To avoid writing checks for small amounts, a petty 
cash fund is created. From this fund the small expense 
items are paid. The best way to safeguard petty cash is to 
make one person responsible for authorizing the payment by 



204 COST FINDING FOR ENGINEERS 

filling out a petty cash voucher directing payment to be made, 
and another party responsible for handling the payments. 
When the petty cash fund is decreased to low ebb by payments, 
the vouchers are sorted as to the name of the account charged 
when payments were made. This permits the correct entry to 
be made in the voucher register when the petty cash fund is 
reimbursed for the amount of the total vouchers previously 
paid. Before a balance sheet is prepared, the petty cash 
vouchers should be recorded on the books as expense items, 
so that the petty cash fund will reflect only actual cash on 
hand. 

8. Deferred Charges versus Prepaid Expenses. 

There is a group of assets in which there are differences 
of opinion as to their classification as a current asset. These 
assets are the deferred charges and the prepaid expenses. 

These two classes of balance-sheet items are sometimes con- 
sidered as current assets, although the general consensus 
of opinion excludes them from working capital. The exclu- 
sion from the current asset group is based upon the fact that 
the items under these two captions could not be converted into 
cash except at an extraordinary loss. In the case of deferred 
charges, no conversion of the expense item into cash is possible. 

While prepaid expense items are frequently listed under 
the heading of deferred charges on the balance sheet, there 
is a technical difference in the nature of the two captions. 

Deferred charges are costs or expenses under some specific 
account title, the total amount of which is not properly charge- 
able against operations of the period in which the expenditures 
were incurred. Expenditures for corporate organization 
expense, mortgage expense, bond discount, tenant improve- 
ments on leased property, moving and machinery relocation, 
etc., the value of which should be spread over several or many 
years, are illustrations of a deferred charge. Each year a 
predetermined pro-rata portion is amortized, that is, an 
expense account is charged, or surplus in the instance of 
corporate organization expense, and a credit is made to the 
account recording the deferred charge. Deferred expense 
items in addition to having no market value are also distinctive 
in that their value is usually intangible. The unamortized 
cost is the value reflected in the balance sheet. 



THE VALUATION OF CURRENT ASSETS 205 

Prepaid expenses are likewise costs or expenses under some 
specific account title, which are not properly chargeable against 
operations of the period in which they were incurred. Pre- 
paid expenses, however, embody an entirely different type 
of expense items. Insurance premiums unexpired, prepaid 
interest, inventories of expense supplies, etc., the unused 
value of which will be charged to expense generally within one 
or two years' time, creates the group known as " prepaid 
expenses. " Prepaid expenses constitute a class of items 
closely bordering on the current asset group. They may be 
rightfully considered a part of the working capital from a 
production viewpoint, since they represent cash tied up in 
service or supplies paid for in advance. It is possible to 
realize on unexpired insurance and expense supplies, but the 
realization is usually accompanied by a material loss. The 
fact that they could not be realized upon except at a large loss 
in comparison with their cost, prohibits the credit agencies from 
treating them as working capital items. The unexpired or 
unused portion of such expense items, at cost, is the value used 
in the balance sheet. 

Questions 

1. State the importance of current asset valuation. 

2. Differentiate between a current asset and a fixed asset. 

3. What is meant by "liquidating assets?" 

4. What is included under the heading of working assets? 

5. Describe what is meant by a "temporary investment." 

6. What is the nature of an advance? 

7. What special funds are treated as current assets? 

8. What are the pertinent principles of valuation pertaining to the 
following assets: 

a. Cash? 

b. Notes Receivable? 

c. Accounts Receivable? 

d. Accruals Receivable? 

9. Discuss the importance of keeping the investment in inventories 
at a minimum. 

10. Why is it considered conservative accounting practice to show 
inventory values at cost or market, whichever is the lower? 

11. In what manner does a finished parts inventory differ from a 
finished goods inventory? 

12. What is meant by a "consigned goods inventory?" 

13. What are some exceptional methods of inventory valuation, and 
under what conditions would it be proper to apply them ? 

14. Differentiate between a deferred charge and a prepaid expense. 



CHAPTER XIV 
THE VALUATION OF FIXED ASSETS 

1. The Importance of Fixed Asset Valuation. 

The principles of fixed asset valuation are very far reaching 
in their importance. Valuation principles covering fixed 
assets affect our whole economic fabric. The prices that are 
paid for commodities, such as food, clothing, shelter, fuel, 
power, and transportation are influenced by valuation. 
Particularly do the principles of valuation enter into the 
public-utility field. The rate the consumer pays for gas, 
power, and transportation is directly determined by valuation 
of fixed property involved. This is evident because the public 
utility is, by law, entitled to a fair return on its capital invested 
after paying all operating costs. Since depreciation of plant 
property and equipment constitutes an operating cost, the 
rates charged for these commodities are directly tied up with 
the values placed upon the fixed assets. The engineer natu- 
rally must play an important part in placing valuation on 
property and equipment for rate-making purposes. 

The engineer's services in valuation are likewise indispen- 
sable in condemnation proceedings for the proposed sale or 
purchase of property, appraisal for setting fair values preceding 
the floating of a bond issue, and for verifying depreciation 
rates. 

Adherence to the proper principles of valuation on fixed 
assets also insures accurate values in the financial statements. 
It is with this in mind that the principles of valuation are set 
forth pertaining to the many types of fixed assets. 

2. Fixed Asset Classification. 

The following table classifies the ,more common kinds of 
fixed assets: 

206 



THE VALUATION OF FIXED ASSETS 



207 



CHART 6. CLASSIFICATION OF FIXED ASSETS 



A. Tangible.. . 





a. 


1. Special funds. . . . < 


b. 
c. 


2. Permanent 


a. 




6. 


investments . . . . < 






c. 




d. 




a. 


3. Construction in 


b. 


process I 


c. 




d. 




e. 




a. 




b. 




c. 




d. 


4. Plant equipment 


e. 


and other prop- 


f. 


erty < 


q. 




7 

A. 



B. Capitalized Expenses . 



C. Intangible.. 



1. Ownership with 
legal rights 



y. 

k. 
I. 

m. 
a. 
b. 
a. 
b. 
c. 
d. 
e. 



2. Ownership a. 



Sinking funds 

Redemption funds 

Replacement funds 

Contingency funds 

Advances to subsidiaries 

Bonds of subsidiaries 

Capital stock of subsidiaries 

Real-estate holdings 

Machinery 

Buildings 

Dies and tools 

Jigs and templates 

Other equipment 

Land 

Buildings 

Machinery 

Shafting and belting 

Small tools 

Jigs and templates 

Dies and molds 

Patterns and drawings 

Containers 

Furniture and fixtures 

Automobiles 

Livestock 

Wagons and harness 

Experimental and research 

Development 

Patents 

Copyrights 

Trade marks 

Trade formulae 

Franchises 

Leaseholds 

Goodwill 



3. Tangible versus Intangible Fixed Assets. 

Note that the fixed assets are divided into the tangibles 
and intangibles. Tangible assets are those items of property 
which possess physical existence. Intangible assets, in con- 
trast, represent rights owned by virtue of law and favorable 
position and possess no physical existence. 

Special funds classed as fixed assets are distinctly different 
from special funds in the current asset group. Sinking, 
redemption, replacement, and contingency funds represent 



208 COST FINDING FOR ENGINEERS 

deposits set aside for some specific purpose. The purpose for 
which the fund is created may be such that the fund will not 
be utilized until the expiration of many years. Such is the 
case with bond redemption and replacement funds. Although 
the fund may increase from year to year, it will remain intact 
for a number of years; hence, their classification as a fixed 
asset. These funds are generally itemized under a separate 
and specific title of " special funds " on the balance sheet. 

Permanent investments should be listed in the balance 
sheet under a separate and specific heading. Quite often they 
represent investment in subsidiary companies or other 
possessions for the purpose of obtaining property or operating 
control. 

Equipment in the process of construction is considered as 
an asset, appearing on the balance sheet. Its value at any 
time is the sum of the expenditures made up to the date of the 
balance sheet. Upon completion of the equipment, the cost 
is transferred to the regular equipment account; that is, the 
cost of the equipment is capitalized. 

Legal advantages and possessions comprise a group of 
rights which may be owned by a business. These rights 
confer a definite advantage upon the owner. They arc gener- 
ally listed in the balance sheet under the specific heading of 
" intangible assets." 

Certain economic possessions such as location, trade name, 
quality of product handled, reputation for service and 
personnel, as well as owning patents, trade marks, and fran- 
chises, combine to create in a going concern what is known as 
" goodwill.' ' This item is usually considered one of the strong- 
est and most valuable assets of a long-established going 
concern. That it is a valuable asset, even though intangible, 
is attested to by the fact that many thousands or even mil- 
lions of dollars may be paid for its estimated value accom- 
panying the sale or purchase of a business. Consider, 
for instance, the intangible values embodied in the names 
Coca Cola, Camels, or Beechnut. 

4. Capitalized Expenses. 

In the classification of fixed assets, it will be noticed 
that an asset group termed " capitalized expenses " is 
interposed between the tangible and intangible groups. 



THE VALUATION OF FIXED ASSETS 209 

Expenses incurred in experimenting upon the new products or 
processes illustrate the nature of items placed in the group. 
Until the result of the expenditures is definitely ascertained, 
it is not known whether they will constitute an operating 
expense or result in a definite value to be treated as an asset. 
And sometimes it requires a period of several years before 
the final result is definitely known. During this time the 
expenditures are treated as deferred charges. A working 
model represents a tangible asset, yet it is of no value until it is 
patented, when it becomes an intangible asset. If it is not 
patented, the cost must be charged off in the year when it 
becomes definitely known to be worthless. 

5. Valuation Principles for Tangible Assets. 

The principles pertaining to the valuation of tangible 
fixed assets are now taken up in detail. 

a. Special Funds. 

The chief problem of valuation for special funds is in making 
certain that accrued interest earned on the fund has been 
added to the principal sum set aside. There is no peculiar 
problem of valuation if the fund is composed of cash. If the 
fund is made up of securities, then the principles of valuation 
apply, as described in Chap. XIII. 

6. Advances to Subsidiary Companies. 

When advances are made to subsidiaries for a long period 
of time, they are considered as permanent investments of 
the holding or parent company. The value shown in the 
balance sheet should be the face of the loan made. The 
interest received on the loan should be credited to an income 
account and not capitalized. 

c. Bonds of Subsidiary Companies. 

When bonds of a subsidiary company are acquired, they 
should be placed on the books at cost value, regardless of 
whether they were acquired at a price above or below par 
value. The chief reason for this practise is in keeping with 
Federal income tax procedure. If the purchase price is shown 
at cost, it is readily available for comparison with the selling 
price in computing loss or gain. The premium or discount on 



210 COST FINDING FOR ENGINEERS 

the bonds set up. in separate accounts, when the bonds are 
sold at a price above or below par, is amortized on the basis 
of life of the bonds on the books of the corporation which 
issued them. 

d. Capital Stock of Subsidiary Companies. 

There are two methods of valuing the capital stock of 
subsidiary companies on the books of a holding or parent 
company. One method shows the investment at cost. An 
alternative method of valuation reflects the holding or parent 
company's share in the periodic net profits and net losses 
of the subsidiary. Under the latter method, the investment 
account balance is increased or decreased by the subsidiary 
earnings or losses in the proportion to the holding or parent 
company's ownership on the total subsidiary capital stock 
issue outstanding with the contra entry to the Surplus account. 

6. Real Estate Holdings. 

Business organizations sometimes acquire property as an 
investment, hoping to realize a profit through a favorable 
turn in the market. The purpose of acquisition also may 
have been in anticipation of future expansion and need for the 
particular piece of property. Again, the practice is followed 
whereby going concerns buy the plants of competitors for 
the purpose of lessening competition. After the business is 
acquired, operations in the newly purchased unit are often 
discontinued. 

The principle of valuation in any of the above cases 
is to show the property at cost. No depreciation charge 
should be made against current operations on this type of 
property, as long as the asset is being held as an investment, 
and is not used in actual operations. Any taxes, maintenance, 
or other assessments may be capitalized from a theoretical 
point of view. In practice, however, these expenses must be 
closed as a direct charge to profit and loss in the year in which 
they are incurred, in order to take advantage of the expense 
as an allowable income tax deduction. Depreciation on this 
type of fixed asset may be also charged off yearly for the 
same reason. 



THE VALUATION OF FIXED ASSETS 211 

/. Construction in Process. 

Many manufacturing concerns build or erect additions 
to their equipment instead of buying or contracting for them. 
Machinery, dies, tools, jigs, templates, and buildings are 
illustrations of some of the asset values constructed within 
or by the plant. 

The cost of the assets under construction, at the time the 
balance sheet is prepared, is the value that should be shown 
in that statement. The market value should never be set 
up as the cost price. Such practice could easily reflect an 
overstated cost accompanied by a profit which had not been 
realized. The question next raised is, what elements con- 
stitute the cost of equipment which a plant itself manufactures? 
There is no question that the materials and labor used are 
to be considered as a cost; but a debatable question arises 
when it comes to determining the amount of overhead expense 
involved. 

In the building of machinery, dies, tools, etc., an amount of 
fuel, power supervision, and machine repairs, insurance, 
and depreciation is necessarily involved. If plant production 
is decreased as a result of asset construction within the plant 
or overhead expenses are increased, then the asset cost should 
bear its proportion of overhead expense. If production is 
neither decreased nor overhead expense increased, then no 
overhead expense should be charged as a part of fixed asset 
cost. The entire question hinges on the principle that the 
production cost of the manufactured product should not be in- 
creased or decreased by such an extraordinary activity as fixed 
asset construction. Increasing production cost results in 
increased profit through overstatement of unit cost shown in 
the finished goods inventory (see Chap. XXV). Decreasing 
production cost by charging too much overhead to assets con- 
structed reflects understated unit cost of the product manu- 
factured, and vitiates comparison of operating results made 
between periods. 

Even though no overhead expense be charged to assets 
constructed within the plant, a fair amount may be estimated 
and added to the material and labor cost to ascertain whether 
or not it would be cheaper to buy than to construct within the 
plant. The overhead thus considered need not be recorded 
as a part of the cost. 



212 COST FINDING FOR ENGINEERS 

No depreciation should be charged off on any asset under 
construction. Depreciation charges begin only after construc- 
tion has been completed. 

g. Land. 

Land should be valued at cost. Cost includes the price 
paid for the actual ground plus all the incidental expenses 
incurred in the purchase of the land. The expenses which 
are properly capitalized as a part of the original cost include 
attorney fees, real estate broker's commissions, and title and 
lien insurance. Any subsequent improvements to the land 
should be capitalized. Improvements may consist of grading, 
sewers, sidewalks, drainage, landscape gardening, and all 
other improvements. 

The land value should not be included with building costs 
but recorded in a separate account, since land is not subject 
to depreciation. 

h. Buildings. 

Buildings should be valued at cost less accumulated depre- 
ciation. Depreciation rates vary from 2 to 10 per cent, 
dependent upon the nature of the structure. Original cost 
of buildings, if purchased, includes the purchase price, plus 
the broker's commissions, attorney fees, and the insurance. 
Any improvements made upon the buildings at the time of 
acquisition are likewise capitalized. 

If buildings are constructed instead of letting a contract, 
then careful record must be made of the construction cost. 
Construction cost includes labor, material, insurance premiums 
on the construction in process, watchmen's wages, supervising 
cost, architect's fees for plans and specifications, material 
testing charges, and all incidental expenses incurred to the 
date of completion. 

i. Machinery. 

Cost less accumulated depreciation is the principle of 
valuation applied to machinery. Cost includes invoice 
price, and freight and cartage prices, plus all installation 
expenses incurred to the point where the machinery is ready 
for operation. Installation expenses include material and 
labor in constructing foundations; also, safety guards enclos- 



THE VALUATION OF FIXED ASSETS 213 

ing gears and belting. Any future expenditure representative 
of an improvement, betterment or addition is properly capital- 
ized, as described in Chap. XII. 

Valuation of machinery constructed within a plant was 
described in a preceding section. 

j. Shafting and Belting. 

The cost of this type of fixed asset is usually shown in a 
separate account. Cost includes purchase price and freight 
charges plus installation expenses. Belting depreciates much 
more rapidly than shafting. The life of various types of 
belting is usually from 2 to 4 years, while shafting may be used 
from 15 to 20 years before replacement is necessary. Never- 
theless, the cost of the two items is usually shown in a single 
account. Cost less accumulated depreciation is the principle 
of valuation used in connection with this asset. 

k. Small Tools. 

Other names for this type of asset are hand tools and bench 
tools. They include chisels, hammers, wrenches, drills, 
bits, saws, etc. While small tools are valued on the basis of 
cost less depreciation, the depreciation cost is usually com- 
puted in a manner quite different from most other fixed assets. 
The nature of small tools is such that it is rather difficult to 
set or obtain a depreciation rate which will be uniform from 
year to year. Small tools are easily broken and often possess 
a peculiarity of straying home with the worker. To obtain a 
more accurate periodic charge to operations for the cost of 
small tools used, therefore, other methods of depreciation are 
provided. 

One plan for obtaining a depreciation charge is to accept 
the toolroom foreman's appraisal value of the small tools at 
the end of each fiscal period. The difference between the 
appraisal value at the close of the year and the balance at the 
beginning of the year plus the additions during the year 
would constitute the annual depreciation charge. No reserve 
for the depreciation on small tools is created; the decrease in 
value as determined by the appraisal is credited to the Small 
Tools account. 

Another method is to capitalize the original cost of the small 
tools, which is shown at the same figure from year to year, 



214 COST FINDING FOR ENGINEERS 

provided that approximately the same quantity is constantly 
maintained. The original cost is not depreciated but each new 
replacement purchase of small tools is charged as an operating 
expenditure. This method attempts to avoid the depreciation 
problem and probably spreads the cost over the fiscal periods 
as equitably as the former method. 

I. Jigs and Templates. 

The cost of jigs and templates should not be capitalized 
unless they represent equipment which will be in general 
use. In case equipment of this type is used in general produc- 
tion, the value placed upon it is cost less accumulated 
depreciation, and, ordinarily, the annual depreciation rate 
(30 to 50 per cent) is high, because this equipment is subject to 
rough use and frequently becomes quickly obsolete. 

Special orders may require special jigs and templates. 
In this case, the cost should be charged directly to the order 
and not capitalized. 

m. Dies and Molds. 

The cost of equipment of this nature is capitalized unless a 
special order involves the making of peculiar sizes and shapes, 
in which case the cost is charged directly to the order. Dies 
and molds are generally made in the tool room or machine 
shop of the plant, in which case the cost is composed of the 
material and labor expenses and a proper proportion of the 
tool room or machine shop burden. 

Depreciation on dies and molds may run from 20 to 50 
per cent per annum, depending upon their structure and the 
manufacturing conditions to which they are subjected. 

n. Patterns and Drawings. 

Assets of this nature, the cost of which is capitalized unless 
made for a special order, usually possess a rather abbreviated 
life. This is due to changes in styles, models, and progress 
in the industry. The annual depreciation rate is quite high, 
therefore, usually 33)^ to 50 per cent. 

o. Containers. 

The cost of all containers is not capitalized. Wood and 
paper cartons, boxes, kegs, barrels, etc., are considered as 



THE VALUATION OF FIXED ASSETS 215 

"v 

operating expenses, either manufacturing or selling. Some 
products manufactured require containers, the nature of which 
gives them a number of years 7 use. This necessitates their 
treatment as an asset. Illustrations are metal drums, cable 
reels, and gas tanks. These illustrations are typical of the 
name given to them as floating equipment, since the containers 
are used for shipment of the product to the customer. 

The method of accounting for floating equipment presents 
a problem. Usually the customer is billed for the cost of the 
container and credited for the amount upon its return. 

Floating equipment may be valued in accordance with 
the methods described under small tools. One method is to 
capitalize the purchase price of the container and by appraisal 
at the close of each period charge the decrease in value existing 
between the ledger account balance and the appraisal value as 
depreciation. The better method, possibly, is to capitalize 
the original number of containers purchased and charge all sub- 
sequent purchases as replacements to an operating expense 
account. The durable - nature of some containers, such as 
metal drums or gas tanks, permits of from 4 to 10 years of 
useful life. If such is the case, the cost may be depreciated at a 
predetermined rate and the accumulated depreciation set up in 
a valuation reserve account. 

p. Furniture and Fixtures. 

There is no peculiar problem in connection with furniture 
and fixtures used in stores, offices, and salesrooms. The 
practice is to capitalize the cost and depreciate at an annual 
rate varying from T% to 20 percent, depending upon the nature 
and use of the item. 

q. Automobiles. 

Automobile trucks and passenger cars used for business 
purposes are valued at cost less accumulated depreciation. 
The depreciation rate varies from 20 to 33^ per cent per annum 
in accordance with the construction of the roads over which 
the cars must run, number of hours traveled daily, and the 
nature of the load carried. Original cost includes freight 
charges, as well as carrying charges, if the cars are purchased 
on the payment plan. 



216 COST FINDING FOR ENGINEERS 

6. Subsidiary Records for Equipment. 

Where each group of equipment, such as machinery, auto- 
mobiles, furniture and fixtures, etc., is composed of many 
separate units, the account itself cannot adequately record 
much more than the total cost. It is important, however, to 
have other information covering a number of details which 
cannot be shown in the ledger account. This detail is 
necessary for the purpose of making the proper entries in 
later years, when the asset is disposed of; therefore, it is 
essential that a supplementary record of each unit of equip- 
ment be maintained (see Chap. XXI). 

The cost of all units of equipment is recorded in the equip- 
ment accounts in the general ledger. The equipment 
accounts are called " control accounts/' since they control the 
detailed information pertaining to each unit of equipment in 
the supplementary or subsidiary records. 

7. Depreciation Reserves for Equipment 

Each different group of equipment, such as machinery, 
furniture and fixtures, etc., should have a valuation reserve 
account in the general ledger. The account, Reserve for 
Depreciation on Machinery, records the accumulated deprecia- 
tion which has been charged off year after year. The dif- 
ference between the cost in the equipment account and the 
accumulated depreciation in the reserve account will repre- 
sent the present book value of the equipment. 

If subsidiary records for all types of equipment are main- 
tained, as described in the preceding section, but one deprecia?- 
tion reserve account is necessary. The subsidiary records, as 
illustrated in Chap. XXI, furnish the required detail pertaining 
to the amount of depreciation in the reserve account appli- 
cable to each unit, which is controlled by the general ledger 
account, Reserve for Depreciation. This controlling account 
reduces the number of depreciation reserve accounts appear- 
ing in the balance sheet. 

8. Donated Assets. 

Sometimes land, buildings, and other equipment are 
received as a gift by a business concern. Industrial develop- 



THE VALUATION OF FIXED ASSETS 



217 



ment organizations are usually the sponsors of this practice, in 
order to influence the location of industry in certain towns and 
cities. 

The question naturally arises as to the value to be placed 
upon a donated asset, since it cost nothing. The answer is 
a fair appraisal value made by engineers. 

The entry to record the acquisition of a gift would be as 
follows: 



General Journal 



Mar. 



17 



Land 

Buildings 

Surplus from Donated Real 
Estate 

To record the receipt of real 
estate from the Industrial De- 
velopment League of X City, 
as a gift- 



5 5,00000 
20,00000 



$25,00000 



The credit of $25,000 represents a net worth item exclusive 
of any other capital invested by the business. 

The next question to be considered is, whether or not the 
building should be depreciated as it has cost the recipient noth- 
ing? The general principle pertaining to the value of equip- 
ment is that the cost is to be depreciated in order to safeguard 
the capital investment. In the case of a gift, however, 
donated capital replaces invested capital. It seems to be 
improper accounting procedure, therefore, to charge operations 
with depreciation on an asset received as a gift. Provision for 
replacement should be arranged for by additional invested 
capital in the future at the time when the equipment received 
as a gift is to be replaced. An argument on the other side of 
the question is that operating expenses will be less in the 
years during which there are no depreciation charges on the 
asset received as a gift. Thus, comparative operating state- 
ments will vary in this respect. 

The best accounting treatment in connection with the 
receipt of equipment as a gift is to amortize the asset value 
against the surplus set up when the gift was recorded on the 



218 



COST FINDING FOR ENGINEERS 



books. The periodic entry until the asset must be replaced, 
estimating a twenty-year life of the building, would be: 

General Journal 



19 
Mar. 



18 



Surplus from Donated Real Estate 
Building 

To amortize Ho of the ap- 
praised value of gift. 



$1,00000 



$1,00000 



9. Equipment Appraisals. 

The services of the engineer are frequently requisitioned to 
place a value on equipment. Due to economic development 
the value of real estate, in particular, may increase greatly 
over its priginal cost in years subsequent to the date of its 
acquisition. When an appraisal is made which discloses that 
the replacement or reproduction value is either in excess of or 
less than the original cost value, the newly established value is 
called the appraisal value or the reproduction value. An 
appraisal of property values may disclose that the present 
replacement value exceeds the book value (original cost less 
the accumulated depreciation in the reserve account) as 
recorded. Such being the case, it means that the original 
investment in the asset does not reflect accurate present value ; 
that appreciation has taken place. An appraisal under such 
circumstances creates what is known as the " sound value " 
of an asset. Sound value is the replacement value less the 
accumulated depreciation computed upon the replacement 
value. An illustration will follow: 

Fifteen years ago a business concern purchased a plot of 
land for $30,000. A building costing $100,000 was immedi- 
ately erected upon the land. The building had been depre- 
ciated at a rate of 3)^ per cent per annum, and, consequently, 
accumulated depreciation in the reserve account amounted to 
$50,000. At the end of the 15-year period an appraisal was 
made, which resulted in placing the present estimated replace- 
ment values of $55,000 upon the land, and of $110,000 upon 
the building. Also, consider that the building will render 
useful service for 15 years from the date of the appraisal. 



THE VALUATION OF FIXED ASSETS 



219 



The sound value of the building is determined in the 
following manner: 

Original Cost $100,000 

Accumulated Depreciation (15 years at 3H per 

cent per annum) 50,000 

Net Book Value $ 50,000 

Cost of Replacement \ $110,000 

Depreciation Computed upon Replacement 

Cost (15 years at 3^ per cent per annum) . . . 55,000 

Sound Value $55,000 



Even though the assets are considered to have increased in 
value, no profit has been realized because the assets have not 
been sold. To show the estimated present value on the books, 
in order to call attention to the appreciated value of the 
property on the balance sheet, entries are made as follows: 



General Journal 



19 
Dec. 



30 



Land 

Reserve for Appreciation, Land 
Value 

To record the increase in 
land value in accordance with 
appraisal made by the X Ap- 
praisal Co. 
Building 

Reserve for Depreciation, Build- 
ing 

Reserve for Appreciation, Build- 
ing 

To record the increase in the 
replacement value of the build- 
ing, in accordance with an ap- 
praisal made by the X Ap- 
praisal Co. 



$25,000 



00 



10,00000 



$25,000 



5,00000 
5,00000 



00 



Since the actual cost must be depreciated within the 
remaining time (15 years) in order to reflect actual operating 
costs, and since the appreciation reserve account must be 
completely amortized within the same period of time, the 
following entry must be made at the close of each fiscal period 



220 



FINDING FOR ENGINEERS 
General Journal 



19 
Dec. 



31 Depreciation on Building $3,33333 

Reserve for Appreciation, Building 333 33 

Reserve for Depreciation on Build- 
ing $3,66666 

To record the yearly depreci- 
ation on building, and the yearly 
amortization of the appreciated 
value of the building. 



As land values are not depreciated, the Reserve for Apprecia- 
tion of Land Value account remains unchanged until final 
disposal of the land takes place, or until another appraisal 
again changes the value. 

10. Valuation Principles for Intangible Assets. 
a. Patents. 

Patents are monopolies on processes and products granted 
by the federal government to an inventor for a period of 17 
years. Patent rights may be acquired through purchase or 
development by research staffs within the plant. Cost is 
the value placed upon the patents in either case. Experi- 
mental and development expenses should not be charged to 
the Patent account until the patent has been legally granted. 
Then the question invariably arises as to what represents cost. 
If records are kept covering the expenses involved in each 
experiment or research problem, then the cost can be easily 
found. Some concerns practice charging off experimental 
and development expenses each period they are incurred, and 
capitalize their patents only at a very small figure. They 
argue that their procedure is warranted because of the doubt- 
ful life of the patent, and that whatever value it may possess 
is reflected through income-earning power. 

Standard practice endeavors, however, to place a cost value 
on patents. Since the patent carries protection against 
infringement to the owner for 17 years, the cost is usually 
amortized over this period. As the patent is not replaced in 
the same manner as a tangible fixed asset may be, the general 
practice is to write down the value of the Patent account 



THE VALUATION OF FIXED ASSETS 221 

instead of setting up a depreciation reserve. Frequently, 
however, a higher rate than one-seventeenth of the cost 
value is amortized yearly, when it is possible to anticipate 
obsolescence of the patents owned. 

Litigation expense arising when a suit is instituted against 
alleged infringers should not be capitalized and treated as a 
cost of the patent. It may be treated as a deferred charge, 
until damages are awarded or the suit is lost. If damages 
are awarded, they should be credited to the deferred charge; 
if the suit is lost, the charge should go to profit and loss. 

Costs of litigation in defending a patent suit should not 
be capitalized but charged as an incidental expense item to 
profit and loss in the year in which the expense was incurred. 

6. Trade Marks and Trade Formulas. 

These types of intangible fixed assets should be valued 
at cost less amortization. Trade marks may be registered 
for a period of 20 years and are renewable. The cost should 
be amortized over the first 20 years, unless the existence of 
the trade mark has established goodwill which may be worth 
vastly more than the cost shown in the Trade Mark account. 
Under these conditions the cost of the trade mark may not 
be amortized. Trade formulas for paint, food products, 
etc., if capitalized, should be amortized rather rapidly, 
especially if they are not protected by patent. 

c. Franchises. 

Franchises are monopolies granted by government to a 
private enterprise permitting them to carry on some particular 
business activity. Franchises may be granted for a limited 
length of time, a long term, an indefinite period or in 
perpetuity. The cost of obtaining the franchise, either 
through purchase or original expense, would represent the 
value at which the intangible asset would be capitalized. 

The length of time over which the cost is amortized depends 
upon the length of time for which the franchise is issued. 

d. Leaseholds. 

A leasehold is a contract whereby a piece of real property 
is leased or rented for a definite term of years. Usually no 
value is recorded unless the rentals are paid in advance. 



222 COST FINDING FOR ENGINEERS 

e. Goodwill. 

Goodwill is probably the most important of the intangible 
fixed assets. Goodwill is created in a business as a result 
of many factors. Some of them are as follows: location, 
name of firm, length of time in business, quality of product 
handled or manufactured, services rendered, excellency of 
management, development and establishment of trade marks, 
trade formulas, patents, franchise possession, advertising 
programs, etc. 

The value of goodwill is computed after taking in consider- 
ation the profits earned over a period of years, and consider- 
ing a fair rate of return on the capital invested. The fact 
that profits in excess of a fair rate of return, have been and are 
being made is fair evidence that goodwill exists. The value 
placed on goodwill, however, depends upon whether or not the 
capital invested is earning more than may be considered a 
fair rate of return. 

For an illustration of goodwill computation consider the 
following illustration: 

Average Net Profit for 5 Years $12,475. 11 

Average Capital Invested for 5 Years $75 , 000 . 00 

Fair Rate of Return on Investment 11 per cent 

In the sale of the business in which the above information 
was taken, it was decided that goodwill would be computed on 
the bases of 5 years' purchase of the average excess profits. 

Average Capital $75,000.00 

11 % of Average Capital $ 8,250.00 

Average Net Profit 12,475. 11 

Average Profits in Excess of (11%) Fair 

Return on the Investment $ 4,225. 11 

Five Years' Purchase Price 5 X $4,225.11, the 

Value of the Goodwill 21 , 125.55 



Goodwill should never be reflected on the books as an 
intangible asset value merely because there is reason to 
believe that it exists. To be recorded properly on the books, 
goodwill must come into existence from one of the following 
sources: at the time of the sale, purchase, incorporation, 
reorganization or merger of business concerns, or with the 
change of a partner. 



THE VALUATION OF FIXED ASSETS 223 

Goodwill, when properly valued, may remain on the books 
for an indefinite period. The factors bringing about goodwill 
may be so outstanding in the success of a business as a going 
concern that the goodwill will represent the most valuable 

asset. 

11. Valuation for the Purposes of Dissolution and Liquida- 
tion. 

Where business establishments cease operations, due to 
sale of property to another concern, decree of court, termina- 
tion of the business contract, or bankruptcy, different principles 
of valuation usually apply to the assets. 

If the business is being sold, or upon retirement or admission 
of a partner, the asset values should be adjusted to reflect 
the market value of the inventory and investments, and the 
sound values of the fixed assets. Notes and accounts receiv- 
able are valued, under these conditions, at a conservative 
value after considering all estimated losses from doubtful 
accounts. 

In the event of a forced sale or bankruptcy, the assets 
usually bring a value much lower than book value and market 
value. Realizable values in connection with a forced sale 
invariably are accompanied by extraordinary losses. 

Questions 

1. Enumerate the reasons why importance is attached to fixed asset 
valuation. 

2. Contrast tangible assets with intangible assets. 

3. Special funds classified as a fixed asset differ in what manner from 
special funds classified as a current asset? 

4. What valuation principle should be adhered to in connection with 
the following long-term investments: 

a. Bonds of subsidiary companies? 

b. Capital stock of subsidiary companies? 

5. How should carrying charges be handled on real estate held as an 
investment? 

6. What is the chief valuation problem in connection with fixed assets 
constructed within a plant? 

7. What is included in the cost of land? 

8. What general valuation principle usually applies to fixed assets 
subject to depreciation? 

9. What items are included in the cost of the following fixed assets: 
*. buildings purchased? 

Buildings constructed by a manufacturing plant? 



224 COST FINDING FOR ENGINEERS 

c. Machinery purchased? 

d. Machinery constructed within a manufacturing plant? 

10. What plans are in use for the valuation of small tools? 

11. What is meant by " floating equipment?" In what manner is 
equipment of this type valued? 

12. What basis of valuation is applied to capital assets which have 
been donated? 

13. Should depreciation on donated capital assets be charged as a 
cost of operation ? 

14. In what manner should the ledger accounts be adjusted to record 
an increase in capital asset values as determined by an appraisal? 

15. What value is placed upon a patent in case it is: 

a. Purchased and used? 

b. Purchased for the purpose of eliminating competition and is 
not used? 

c. Developed within the business? 

16. At what value are patents shown on the balance sheet? 

17. Describe what is meant and give illustrations in each of the 
following : 

a. Trade mark. 
6. Trade formula. 

c. Franchises. 

d. Leaseholds. 

18. What is goodwill? 

19. What factors tend to create goodwill? 

20. Is it considered good accounting practice to show goodwill on the 
books? Under what conditions? 

21. At what value should goodwill appear on the balance sheet? 

22. What entry is necessary to write goodwill off the books? 

23. What is meant by realizable value? When is it used? 



PART III 
FACTORY CONTROLS 

CHAPTER XV 

COLUMNAR BOOKS A MEANS TO FACTORY 
CONTROL 

1. The Nature of Columnar Journals. 

A description of two-column special journals and their 
advantages in use already have been given. The two-column 
journal may be indefinitely expanded to meet the needs of any 
particular business. The expansion consists of an additional 
number of money columns in the journals. 

Columnar journals may be defined as books of original 
entry containing a series of columns, the caption of each money 
column bearing the name of an account in the general ledger. 

There is no uniform ruling for columnar journals. The 
nature of an accounting system in a given industry governs the 
form. Different business concerns in the same industry may 
have journals with varied rulings. It is possible to illus- 
trate but a few models of columnar journals here, but it must 
be remembered that there are hundreds of different rulings and 
forms. The basic forms are described in this chapter. A 
knowledge of these journals is the keynote to the under- 
standing of any columnar journal system. 

2. The Purpose of Columnar Journals. 

Manufacturing plants and commercial concerns benefit from 
the use of columnar journals in that they provide more 
adequate control. Columnar journals form the basis for a 
greater measure of control by: 

a. Making possible an immediate and detailed analysis of 
transactions as soon as they are recorded. 

6. Providing the necessary summaries to build up controlling 

accounts. 

225 



226 COST FINDING FOR ENGINEERS 

Sales may be separated by departments, lines, or individual 
products. Purchases may be recorded likewise. The pur- 
chase journal or voucher register may be adapted to record 
the purchase of all expense items and fixed assets. This is a 
more flexible plan than could possibly exist in using a two- 
column purchase journal. 

Cash receipts may be analyzed as to their source, such as 
cash sales, receipts on account from customers, and miscella- 
neous receipts of various nature. Cash disbursements may be 
segregated in various columns for expenses, payment to 
creditors, and other miscellaneous payments. 

The greatest benefit to be derived from columnar journals 
is that it makes possible the use of controlling accounts. 
Without controlling accounts modern cost-accounting pro- 
cedure would be impossible. Special control accounts for 
manufacturing concerns are described in Chaps. XIX, XX, 
and XXI. The principles of control accounts, pertaining to 
accounts receivable and accounts payable, are described in 
Chap. XVI. 

The number of columns contained in each journal is deter- 
mined by the frequency with which certain transactions occur. 
It is obvious that the purchase journal or voucher register 
would have a separate column analyzing the purchases by 
departments, lines of goods, or individual commodities. On 
the other hand, it would not be exercising good judgment to 
have a special column in the voucher register of a foundry 
to record the purchase of automobile trucks. A special 
column to record the purchase of fixed assets would be folly 
because of the infrequent occurrence of such transactions. 

A detailed description will now be given of the columnar 
journals in which are recorded transactions pertaining to 
sales, cash receipts, purchases, cash disbursements, and other 
miscellaneous items. 

3. The Columnar Sales Journal. 

Sales made on account are recorded in this journal. Cash 
sales may be, but usually are not recorded in this journal. 
Each individual business has its peculiar style of sales journal. 
For illustrative purposes, a simple form of a sales journal is 
shown as follows: 



COLUMNAR BOOKS A MEANS TO FACTORY CONTROL 227 





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CQ ,-s 
M 




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S 53 8 


s 


1 S 8 


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od rH co 0^ *o oo 

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228 COST FINDING FOR ENGINEERS 

a. The Principle of Debit and Credit. 

The accounts receivable column is the only debit column in 
the preceding sales journal. In that column is recorded each 
individual sale made on account. These debits constitute an 
increase in the accounts receivable asset. 

Each account in the sales column is a credit since sales 
represent an increase in income. The sales are recorded by 
departments which permit convenient daily and monthly 
analyses. 

4. The Columnar Cash Receipts Journal. 

The sources of the receipts of all cash are analyzed in the 
cash receipts journal to a degree that is deemed necessary 
in the individual business concern. An illustration of the 
cash receipts journal is shown on page 229.. 

a. The Debit and Credit Principle Explained. 

In the cash receipts journal the columns for cash and sales 
discount record debits; the columns labeled accounts receiv- 
able, cash sales, and general ledger, record the credits. 

All receipts of cash must be entered in the cash column, 
while the source of receipts is placed in one of the credit 
columns. All items credited in the columns, accounts 
receivable and cash sales are self-explanatory. Where no spe- 
cially captioned column is available in which to credit the source 
of the receipt, the credit must be placed in the general ledger 
column. The sales discount column records the discount 
allowed customers who make payments on account. Since 
sales discount represents a decrease of income or an increase 
of expense, the total of this column must be considered a debit. 

5. The Columnar Purchase Journal or Voucher Register. 

The purchase journal in its columnar form serves a purpose 
vastly broader in scope than the two-column purchase 
journal. In its columnar form, it registers the liability for 
payment of all expenditures either capital or operating in 
nature. The purchase of expense items and fixed assets, as 
well as the purchase of raw materials and finished goods, is 
registered in this journal. The purchase journal operated 
with vouchers is called a " voucher register/' The details 



COLUMNAR BOOKS A MEANS TO FACTORY CONTROL 229 



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of the voucher system are described in Chap. XVII. The 
voucher register is something more than a record of the pur- 
chase of materials and merchandise of various types. In 
the voucher register is recorded the authority for the payment 
of all cash for purchases as well as for payrolls, various other 
expenses, petty cash reimbursement, and capital withdrawals. 
The use of the columns labeled voucher number, check 
number, and date paid, as shown in form 40, will be illustrated 
in Chaps. XVI and XVII. 

a. The Principle of Debit and Credit. 

The accounts payable column is the only credit column in 
the voucher register with the exception of the sundry credit 
column. In the accounts payable column is recorded each 
individual amount which the business is,obligated to pay. All 
other columns record increases in expenses, hence they are 
debit columns. The purpose of the sundry debit column is to 
record increases in expense or asset items, which are so 
infrequent in occurrence that it is not expedient to have 
special columns. 

The sundry credit column records freight in, allowances, 
refunds to customers, and other transactions which would 
otherwise require a general journal entry. 

6. The Columnar Cash Disbursement Journal. 

Cash disbursement journals vary in their rulings in accord- 
ance with the requirements of different business concerns. 
One form of a columnar cash disbursements journal used to 
record cash payments is shown in the following illustration. 
A description of the use of the voucher number and check 
number columns is reserved to Chap. XVII. The explanation 
column is not used if a voucher system is in operation, 
since each voucher reveals the reason for the transaction 
recorded. Likewise, the general ledger column is not needed, 
if a voucher system is in operation. 

a. The Debit and Credit Principle Explained 

The cash and purchase discount columns in the cash 
disbursements journal record the credits; the accounts payable 
column records the debits. 



COLUMNAR BOOKS A MEANS TO FACTORY CONTROL 231 



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COLUMNAR BOOKS A MEANS TO FACTORY CONTROL 233 



A record of the payment of all cash must be made in the 
cash column. Since the payment of cash represents a decrease 
in an asset, obviously the amounts recorded in the cash 
column are credits. Discount allowed on purchases represents 
a saving made from prompt payment of invoices. The saving 
is comparable to a decrease of expense, hence must be a credit. 

All items entered in the accounts payable column represent 
a decrease of the amount owed to creditors, hence all amounts 
recorded therein are debits. This form of a columnar cash 
disbursements journal is illustrated to tie in with the voucher 
register illustrated on page 231 of this chapter. 

7. The Columnar General Journal. 

An accounting system involving the use of controlling 
accounts requires a columnar form of the general journal. 
This journal generally is not used, however, in a manufactur- 
ing plant of extensive size. A journal voucher is usually 
substituted for the journal. In a large plant, adjusting and 
correcting entries are being made constantly by the many 
departments. Widely scattered departments, such as the treas- 

FORM 42 



Journal Voucher ^ 8-137 

To the General Accounting Department 



Date 



19.. 



Account 



Dr, 



Cr. 



Sales Returns and Allowances 
N. Ridlen (Account Receivable) 

Allowance on damaged goods attri- 
buted to poor packing prior to shipment 



$61 



83 



$61 



83 



Complete explanation must accompany each entry 



SIGNED . 



234 



COST FINDING FOR ENGINEERS 





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COLUMNAR BOOKS A MEANS TO FACTORY CONTROL 235 



urer's office, the accounts payable department, the cost depart- 
ment, the stores department, and the accounts receivable 
department, would be unable to use the same journal. The 
journal voucher records a separate entry on a loose-leaf sheet, 
which ordinarily appears in the general journal. The journal 
voucher is sent to the general accounting department, where 
it is recorded in the general ledger accounts and placed on 
permanent file. 

To develop the controlling account principle, the columnar 
general journal is illustrated on page 234. The model form 
shown is termed a " split journal," since the debit and credit 
columns are on opposite sides of the account column. 

a. The Debit and Credit Principle. 

All columns to the left of the account column are debit 
columns; all columns to the right are credit columns. Trans- 
actions involving debits to the accounts receivable column and 
credits to the accounts payable column in the general journal 
occur rather rarely. An example whereby a debit would 
be required in the accounts receivable column, would be in 
case a customer failed to take up his note at maturity. The 
entry necessary would be : 



(Dr.) 



General Journal 



(Cr.) 



Accounts 






General 


Receivable 






Ledger 


$5,000 


00 




Globe Glass Company 












Notes Receivable 


$5,000 


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To charge back a dishonored 












note to the maker, Globe 












Glass Company. 







Similarly, the refusal to pay the company's own note would 
require a credit to the accounts payable column. 

8. Other Columnar Journals. 

Other columnar journals may be required, depending upon 
the nature of the transactions within the individual business. 
Some other columnar journals not described in this text are as 
follows: 



236 COST FINDING FOR ENGINEERS 

Sales Returns and Allowance Journal. 
Purchases Returns and Allowance Journal. 
Notes Receivable Journal. 
Notes Payable Journal. 
Petty Cash Journal. 
Factory Journal. 

9. Advantages of Columnar Journals. 

So many advantages accompany the use of columnar 
journals that they are used almost universally. Describing 
the two-column journal in Chap. IV was merely for the purpose 
of explaining the basic principle of journal subdivision. The 
advantages in using columnar journals are as follows: 

a. Makes possible more immediate detailed analysis of 
transactions. 

6. Transactions are recorded with greater rapidity. 

c. Time is conserved in posting monthly summaries which 
are posted from column totals. 

d. Errors are minimized and localized, since the debit and 
credit columns must be balanced in each journal before 
postings are made. 

e. Permits the installation of controlling accounts, which 
facilitate the application of cost control. 

Questions 

1. Define a columnar journal. 

2. In what manner does the use of columnar journals facilitate 
accounting control? 

3. What principle determines the number of columns necessary in 
each journal? 

4. Explain the principle of debit and credit applicable to the columnar 
sales journal. 

5. Explain the principle of debit and credit applicable to the columnar 
cash receipts journal. 

6. Explain the use of the "general ledger" column. 

7. What is a voucher register? 

8. Explain the principle of debit and credit applicable to the voucher 
register. 

9. Explain the use of the sundry column in the voucher register. 

10. Explain the principle of debit and credit applicable to the columnar 
cash disbursements journal. 

11. What is a journal voucher?. It is used as a substitute for what? 

12. Name some other columnar journals. 

13. What are the advantages in using columnar journals? 



CHAPTER XVI 

CONTROL ACCOUNTS WITH CUSTOMERS AND 
SUPPLY COMPANIES 

1. The Subdivision of the Ledger. 

The importance of the special journals has been described 
in detail. Journals are not the only books of accounting 
record, however, to which specialization applies. The ledger 
which has been described and illustrated up to this chapter 
is termed the " general ledger/' but it, too, may be sub- 
divided. There are at least two types of detail accounts 
which should not appear in the general ledger. They are the 
customers 7 and creditors' accounts, which should appear only 
as summaries in the general ledger. The peculiar problems 
created in connection with these accounts are next considered. 

The majority of business concerns are constantly getting 
new customers. Each new customer requires a new account. 
New accounts with creditors, likewise, are constantly being 
added, while old ones may be closed never to be used again. 
Since there is a necessity for the opening of new accounts and 
closing of discarded accounts, it is anything but convenient 
to have them in the general ledger. The segregation of 
accounts receivable and accounts payable from the general 
ledger is ohe of the most common features of the modern 
accounting system. 

The general ledger may be expanded indefinitely. Book- 
keeping machines are used in many of the large business 
concerns today, the machine operators making the postings 
from invoices, credit memorandums, cash records, vouchers, 
and journal vouchers. 

Separate ledgers in which are kept the customers' accounts 
are termed " accounts receivable" ledgers. These ledgers are 
called " subsidiary ledgers " because they are supplementary 
or auxiliary to the general ledger. Large manufacturing con- 
cerns with thousands of customers may have a hundred or 
more accounts receivable ledgers. 

237 



238 COST FINDING FOR ENGINEERS 

The modern way to handle accounts payable is to pre- 
pare a voucher for each, it em for which a cash payment must be 
made. For each invoice covering the purchase of an expense 
or an asset, a voucher is prepared and placed in a file drawer 
until payment is due. A voucher is a written order authoriz- 
ing the payment of money and is described in full in the next 
chapter. The unpaid vouchers form a subsidiary record of 
the accounts payable, comparable to the accounts receivable 
ledger. 

Expansion of the general ledger does not consist only 
of the segregation of accounts receivable and accounts 
payable. Any other group of accounts of like nature may be 
removed from the general ledger and placed in a special 
subsidiary ledger, or other record. 

In addition to the customer's ledger and unpaid voucher 
file, other subsidiary ledgers or records in common use are as 
follows: 

Raw Material or Stores Ledger. 

Work in Process Record. 

Finished Goods Ledger. 

Expense Ledger. 

Equipment Ledger. 

These ledgers are described in detail in Chaps. XIX, XX, 
and XXI. 

2. Advantages of Subsidiary Ledgers. 

The use of subsidiary ledgers and other similar records offer 
numerous advantages. Chief among these are : 

1. The subdivision of the ledger fits in with the special 
journals, permitting one or more persons to have supervi- 
sion and control over a special line of transactions. An 
example would be the posting from the sales journal to the 
customer's ledger, or posting from the cash receipts journal 
to the customer's ledger. In this manner responsibility is 
localized within narrow limits. 

2. All the detailed accounts of one particular type are 
placed within a single ledger, group of ledgers, or other 
record. 

3. Numerous clerks may work on the various ledgers at the 
same time. 



CONTROL ACCOUNTS WITH CUSTOMERS 239 

3. Controlling Accounts. 

Some provision must be made whereby a control is exercised 
over the individual detailed accounts which are removed from 
the general ledger to the subsidiary ledger. A subsidiary 
ledger is controlled by a general ledger account having the 
same name as the nature of the accounts contained in the 
subsidiary ledger. 

A control account is, then, a general ledger account, con- 
trolling some subsidiary ledger or ledgers or other record. The 
control is established by proving that the aggregate of the, 
balances of all accounts in the subsidiary ledger equals the 
balance in its control account. 

A separate control account must be maintained in the 
general ledger for each subsidiary ledger or ledgers in which 
accounts of a different nature are housed. To control 
properly the subsidiary ledgers enumerated on page 238, the 
following controlling accounts would appear in the general 
ledgers. 

Raw Material (controlling account). 

Work in Process (controlling account). 

Finished Goods (controlling account). 

Expense (controlling account). 

Equipment (controlling account). 

There may be a separate controlling account for each 
accounts receivable ledger, or one controlling account may 
control several such ledgers. A control account for each 
subsidiary ledger is the best policy, because responsibility for 
the monthly proof is localized and placed on one person. 

4. Constructing Controlling Accounts. 

Controlling accounts are built up in the general ledger by 
making summary postings from the various columnar journals. 
It should be quite clear, now, why columnar journals arc 
prerequisite to the use of controlling accounts. Both the 
Accounts Receivable and Accounts Payable controlling 
accounts will be illustrated, through posting the columnar 
journals used as illustrations in the preceding chapter. 

5. Posting the Columnar Sales Journal. 

Two types of postings are made from the columnar sales 
journal. Current postings are made as shown on pages 241-242. 



240 



COST FINDING FOR ENGINEERS 



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CONTROL ACCOUNTS WITH CUSTOMERS 241 < 

A. Debits: 

1. From the accounts receivable column (each individual 
amount) to the customers 7 accounts in the accounts receivable 
ledger. 

The summary postings are made as: 

A. Debit: 

1. For the total of the accounts receivable column to the 
Accounts Receivable controlling account in the general ledger. 

B. Credit: 

1. For the total of each of the sales column^ to the different 
Sales accounts in the general ledger. 

The sales journal from which illustrative postings are made 
to the ledger accounts is shown on page 240. 

The summary posting reference is made by showing the page 
of the ledger to which the account is posted, in the same 
column just below the posted amount. The posting reference 
is generally encircled to prevent it from being confused with 
an amount to be posted. 

Before any summary postings are made, each column 
should be totaled to verify the accuracy in recording the 
transactions. The sum of the entries in the debit columns 
must equal the total of the entries in the credit columns. 
In the sales journal illustration, this mathematical proof of 
accuracy is as follows: 

Accounts Receivable $4,320.68 

Sales, Dept. A $1,392.70 

Sales, Dept. B 1,398.76 

Sales, Dept. C 1,529.22 

$4,320.68 $4,320.68 

The ledger accounts affected by posting the sales journal are 
as follows : 

General Ledger Accounts Receivable Ledger 



Accounts Receivable 

(controlling account) 3 E. D. Wise 50 



SI 


$4,320.68 







SI 


$200 


.00 





242 COST FINDING FOR ENGINEERS 

General Ledger (Cont.) Accounts Receivable Ledger (Cont.) 



Sales, Dept. A 



Nix Novelty, Corp. 51 







81 


$1,392.70 





SI 


$2 


,418 


07 





Sales, Dept. B 



10 



E. C Normile 



52 







SI 


$1,398.76 



SI 


$280.00 





Sales, Dept. C 



11 



Faire & Co. 



53 







SI 


$1,529.22 





SI 


$55 


42 





Janitor's Supply Co. 54 





SI 


$910 


20 





H. C. Crane 





SI 


$456 


99 





After the sales journal has been completely posted, note 
that the summary debit posting to the Accounts Receivable 
controlling account ($4,320.68) is equal to the sum of all the 
debit postings to the customers' accounts in the accounts 
receivable ledger. It is significant, therefore, to call attention 
to this general principle involved in controlling accounts. 
Each amount posted, either a debit or credit, to an individual 
account in a subsidiary ledger, also must be reflected in like 
amount in the controlling account. 

The fact that the individual items in the accounts receivable 
column are posted daily as debits to the customers' accounts, 
and that a summary posting is made from the same column 
does not prevent the general ledger from balancing. The 
current postings are made to the customer's account in 
the customers' ledger, and are not shown individually in the 
trial balance. The summary posting is made to the general 
ledger account, Accounts Receivable, known as the " con- 
trolling account," and only the balance in this general ledger 
account is used in the preparation of the trial balance. 



CONTROL ACCOUNTS WITH CUSTOMERS 



243 



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244 COST FINDING FOR ENGINEERS 

6. Posting the Columnar Cash Receipts Journal. 

Postings made from the columnar cash receipts journal 
are of two kinds, namely, current and summary. The current 
postings are made as follows : 

A. Credits: 

1. From the accounts receivable column (each individual 
amount) to the customers 5 accounts in the accounts receiva- 
ble ledger. 

2. From the general ledger column (individual amount) each 
to the accounts in the general ledger, as named in the account 
column of the journal. 

The summary postings are made as follows: 

A. Debits: 

1. For the total of the cash column to the Cash account- 

2. For the total of the sales discount column to the Sales 
Discount account. 

B. Credits: 

1. For the total of the accounts receivable column to the 
Accounts Receivable controlling account in the general ledger. 

2. For the total of the cash sales column to the Sales, 
Dept. A account in the general ledger. 

The general ledger column total is not posted as a summary, 
because each amount entered in that column is posted currently 
to individual accounts in the general ledger. 

The cash receipts journal is illustrated on page 243. From 
this journal postings are made to the ledger accounts. 

The column totals in the cash receipts book show the existence 
of debit and credit equality before the summary postings are 
made. This proof should always be made before posting the 
column totals. 

Cash $24,375.24 

Sales Discount 7 . 60 

Accounts Receivable $ 480 . 00 

Cash Sales 3,402.84 

General Ledger _. _ 20,500.00 

$247382.84 $247382.84 

After the postings are complete from the cash receipts 
journal, ignoring the postings from any other journals, the 
ledger accounts appear as follows: 



CONTROL ACCOUNTS WITH CUSTOMERS 245 

General Ledger Accounts Receivable Ledger 



Cash 1 E. D. Wise and Co. 50 




CR2 


$24,375.24 






CR2 


$200.00 



Sales Discount 



CR2 


$7.60 





Accounts Receivable 
(controlling account) 3 







CR2 


$480.00 



Sales, Dept. A 







CR2 


$3,402.84 



L. Y. Hoke, Capital 







CR2 


$10,000.00 



J. C. Lowe, Capital 







CR2 


$10,000.00 



Notes Receivable 



J 




CR2 


$500.00 



E. C. Normile 



52 







CR2 


$280.00 



Again, note that the total of the individual credit postings 
from the cash receipts journal to the customers' accounts 
in the accounts receivable ledger is the same as the one sum- 
mary figure posted as a credit to the controlling account 
($480). 

7. Posting the Voucher Register. 

A modern accounting system for a concern buying from 
numerous creditors has no provision for creditors' accounts in 
the general ledger. In the place of accounts payable ledgers, 



246 



COST FINDING FOR ENGINEERS 



a card index system records the volume of business transacted 
with each creditor. The card index of creditors is described in 
Chap. XVII, in connection with the voucher system. Even 
this plan is frequently eliminated in favor of a voucher file 
record. 

From the voucher register the current postings are made as 
follows: 

A. Debits: 

1. From the sundry debit column to the accounts in the 
general ledger as named in the account column. 

B. Credits: 

1. From the sundry credit column to the accounts in the 
general ledger. 



FORM 



Voucher 


(Cr.) (Dr.) (Dr.) (Dr.) 


Date 


Payable To 


Voucher 
Number 


Check 
Num- 
ber 


Date 
Paid 


L. F. 


Accounts 
Payable 


Purchases 


Dept. A 


Dept. B 


Dept. C 


19- 






























June 


1 


Rome Supply Co. 


70 




Trade 




$ 5,000 


00 


$2,500 


00 






$2,500 


00 












Acceptance 






























June 2 






















2 


Rentor Realty Co. 


71 




11 2 




300 


00 
















4 


Clinton Machine Co. 


72 




" 15 




2,000 


00 


1,000 


00 


$ 600 


00 


400 


00 




5 


Sun Printing Co. 


73 




" 5 




62 


50 
















7 


B.andL.E.Rwy.Co. 


74 




" 8 




72 


20 
















10 


Office Equipment 






























Corp. 


75 








250 


00 
















13 


Howard Tool Co. 


76 




June 23 




4,109 


70 


561 


22 


2,210 


96 


1,337 


52 




16 


Payroll 


77 




" 16 




675 


00 
















18 


Huxley & Mill 


78 




" 27 




2,500 


00 


1,200 


00 


700 


00 


600 


00 




20 


Standard Supply Co. 


79 








26 


00 
















24 


Globe Refinery 


80 








16 


20 




























$15,011 


60 


$5,261 


22 $3, 510 


96 


$4,837 


52 



(9) 



(13) (14) 



(15) 



CONTROL ACCOUNTS WITH CUSTOMERS 



247 



The summary postings are made as follows! 

A. Credit: 

1. The total of the accounts payable column which is 
posted to the Accounts Payable controlling account in the 
general ledger. 

B. Debits: 

1. For the total of all other column totals, excepting the 
sundry columns, to the general ledger accounts as named at the 
head of the column. 

The sundry debit and credit column totals are not posted 
as summaries, since each amount therein is posted currently to 
the individual accounts in the general ledger. 

The voucher register is shown below. Postings are made 
to the ledger accounts from this register. 



cgister V2 
TDT.) (Dr.) (D*.) (Dr.) (Dr.) (Dr.) 


freight 
id Cart- 
age In 


Delivery 
Expense 


Store 
Wages 


Freight 
Out 


Office 
Expense 


Office 
Salaries 


Sundry 


Dr. 


Cr. 


L. F. 


Account 


























$300 


00 






21 


Rent 


























62 


50 






22 


Store Expense 


$60 


00 










$12 


20 














































250 


00 






23 


Office Equipment 






$50 


00 


$500 


00 










$125 


00 






























$26 


60 












60 


12 


Freight and Cartage In 






16 


20 






























$60 


00 


$66 


20 $500 


00 


$12 


20 


$26 


60 


$125 


00 


$612 


50 




60 




(12) 


(16) 


(17) 


(18) | (19) | (20) | (V) | (V) 



248 



COST FINDING FOR ENGINEERS 



The following ledger accounts are affected by posting the 
voucher register, all other postings from other journals being 
omitted. 



General Ledger 



Accounts Payable 
(controlling account) < 


Office Salaries 20 


S 

V2 $125.00 


z Re 


>nt 21 


Freight and 


V2 $15,011.6 

Cartage In 15 


V2 $300.00 

J Store E 


Ixpense 22 




V2 


$60.00 

Purchases 


V2 $0.6 

Dept. A 1! 




V2 


$5,261.22 

Purchases 


, Dept. B 14 


V2 $62.50 

[ 

Office Eq 


uipment 23 




V2 


$3,510.96 

Purchases 


, Dept. C U 


V2 $250.00 

> 






V2 


$4,837.52 

Delivery 


List of unpaid vouchers made up 
during the month, each of which is 
recorded in the voucher register 
Expense 16 before payment is made. 




V2 


$66.20 

Store 1 


K^ages 17 


Vou- 
cher 
Num- 
Date her In Favor of: Amount 


19 

June 1 70 Rome Supply Co. $5,000.00 
2 71 Renter Realty Co. 300.00 
4 72 Clinton Machine Co. 2,000.00 
5 73 Sun Printing Co. 62.50 
! 7 74 B. L &. E. Rwy. Co. 72.20 
10 75 Office Equipment 
Corp. 250.00 
13 76 Howard Tool Co. 4,109.70 
16 77 Payroll 675.00 
I 18 78 Huxley & Mill 2,500.00 
20 79 Standard Supply Co. 26.00 
24 80 Globe Refinery 16.20 

$15,011.60 




V2 


$500.00 
Freigl 


it Out IS 




V2 


$12.20 

Office I 


]xpense IS 




V2 


$26.60 





CONTROL ACCOUNTS WITH CUSTOMERS 249 

In posting the voucher register, the summary credit 
posting to the Accounts Payable control account ($15,011.60) 
is the same amount as the total of the vouchers made up 
during the month and recorded in the voucher register. 
These vouchers are held in the unpaid file until the date of 
payment arrives. 

8. Posting the Columnar Cash Disbursements Journal. 

The only postings made from the columnar cash disburse- 
ments journal are summary ones, when a voucher system is in 
operation as herein outlined. The summary postings are 
made as: 

A. Credits: 

1. For the total of the cash column to the Cash account. 

2. For the total of the purchase discount column to the 
Purchase Discount account. 

B. Debit: 

1. For the total of the accounts payable column to the 
Accounts Payable controlling account in the general ledger. 

There are no current postings required where a voucher 
system is used, since it eliminates the necessity for an accounts 
payable ledger. As the vouchers are paid, they are removed 
from the unpaid file and placed in the paid file. Each paid 
voucher must be checked in the voucher register as having 
been paid. By so doing the Accounts Payable control account 
is proved. The total of unpaid vouchers or unpaid accounts 
payable, as shown in the voucher register, must equal the 
balance in the Accounts Payable control account in the 
general ledger. 

The cash disbursements journal serves, then, merely as a 
record of payments in chronological order, and as a basis for a 
debit total used in building up the Accounts Payable control 
account. 

The cash disbursements journal from which the postings 
are made is shown on page 250. 



25U 



COST FINDING MR ENUINEKKS 

FORM 47 



Cash Disbursements Journal ,^ . ,_ x ,_ . 
(Cr.) (Or.) (JDr.) 










Pur- 




Date 


Account 


L. F. 


Cash 


chase 
Discount 


Accounts 
Payable 


19 




















June 


2 


Rentor Realty Co. 




$ 300 


00 






$ 300 


00 




5 


Sun Printing Co. 




62 


50 






62 


50 




8 


B. & L. E. Rwy. Co. 




72 


20 






72 


20 




15 


Clinton Machine Co. 




1,980 


00 


$20 


00 


2,000 


00 




16 


Payroll 




675 


00 






675 


00 




23 


Howard Tool Co. 




4,068 


60 


41 


10 


4,109 


70 




27 


Huxley & Mill 




2,47500 


25 


00 


2,500 


00 










$9, 633 [30 


$86 


10 


$9,719 


40 










(1) 


(8) 


(9) 



The general ledger accounts after posting from the cash 
disbursements journal, ignoring any postings from other 
journals are as follows: 



General Ledger 
Cash 



List of vouchers paid during the 
month, a record of which is made 
in the Voucher Register. 



CD3 $9,633.30 



Purchase Discount 







CD3 


$86. K 



Accounts Payable 
(controlling account) 



CD3 


$9,719.40 





Vouch- 




er 








Num- 




Amount 


Date 


ber 


Payment Made to 


Voucher 


19 








June 2 


71 


Rentor Realty Co. 


$ 300 00 


5 


73 


Sun Printing Co. 


G2.50 


8 


74 


B. & L. E. Rwy. Co. 


72.20 


15 


72 


Clinton Machine Co. 


2,000.00 


16 


77 


Payroll 


675.00 


23 


76 


Howard Tool Co. 


4,109.70 


27 


78 


Huxley & Mill 


2,500.00 



$9,719.40 



In posting the cash disbursements journal, the summary 
debit posting to the Accounts Payable controlling account 
($9,719.40) is the same amount as the total of the individual 
vouchers recorded as paid in the voucher register. 

9. Posting the Columnar General Journal. 

Both current and summary postings are made from the 
general journal. The current postings are made as: 



CONTROL ACCOUNTS WITH CUSTOMERS 251 

A. Debits: 

1. From the left-hand accounts receivable column for each 
amount therein, to the customers' accounts in the accounts 
receivable ledger as named in the account column. 

2. From the left-hand general ledger column for each 
amount to the accounts in the general ledger as named in the 
account column. 

B. Credits: 

1. From the right-hand accounts receivable column for each 
amount therein to the customers' accounts in the accounts 
receivable ledger as named in the account column. 

2. From the right-hand general ledger column for each 
amount to the accounts in the general ledger as named in the 
account column. 

Each amount entered in the accounts payable columns, 
either debit or credit, is for the purpose of adjusting some 
voucher. Since no creditors 7 ledger is operated, the amounts 
are not posted currently, but merely serve to adjust the 
Accounts Payable control account and vouchers. 

The summary postings are : 

A. Debits: 

1. From the left-hand columns: 
a. For the total of the accounts receivable column to 

the Accounts Receivable control account in the 

general ledger. 
6. For the total of the accounts payable column to the 

Accounts Payable control account in the general 

ledger. 

B. Credits: 

1. From the right-hand columns: 

a. For the total of the accounts receivable column to the 
Accounts Receivable control account in the general 
ledger. 

6. For the total of the accounts payable column to the 
Accounts Payable control account in the general 
ledger. 

No totals are posted from the general ledger columns 
because these totals do not affect controlling accounts. The 
individual amounts in the general ledger columns are posted 



252 



COST FINDING FOR ENGINEERS 



o 



ii 



o 



G ' 

o i 



a 

a 

o 
- 

1 

a 

C? 
O 



| 
09 

a 

03 



W 

"S 

OS 



o 

8 



a 



5 ^ 

I > 



$ O 

If 



00 



8 



S 



g 



g 

CO 



g 

O 



> 



1 



1 S 



d 



^ao O 

^ a 
43 .& ^ 
;T .& 

3 
** rt 5 



i 









a 

4) 



a 

>> 
-*^> 

r3 

^ 
o 



o 



-s 






2 *^ 



tf 



gg 



O 
O 



00 
^H 

^< 



S 






g 



18 



CONTROL ACCOUNTS WITH CUSTOMERS 



253 



Posting the columnar general journal affects the following 
ledger accounts, eliminating the postings from all other 
journals. 



General Ledger 



Accounts Payable 
(controlling account) 



Accounts Receivable 
(controlling account) 



J6 


$5,000.00 









J6 


$2,418.07 



Delivery Equipment 24 



H. C. Lowe, Capital 6 





J6 


$800 


.00 









J6 


$1,300.00 



Notes Receivable 



Notes Payable 



25 





J6 
J6 


$ 500.00 
2,418.07 









J6 


$5,000.00 



Accounts Receivable Ledger 
Nix Novelty Corp. 51 



J6 



$2,418.07 



Unpaid vouchers reduced in 
amount as a result of an accounts 
payable adjustment. 

Voucher Amount 

Number Payment Made to Voucher 

70 Rome Supply Co. $5 , 000 . 00 



Date 

19 

June 2 



10. The Same Concern Both a Customer and a Creditor. 

It sometimes happens that a business concern will buy and 
sell to the same firm. If this is the case, it is better to set up 
a customer's account and also prepare a voucher for the 
amount owed. Settlement of the two balances may be 
handled separately by a receipt of cash for the amount 
receivable and a payment of cash for the amount owed. 
Settlement of the balance owed the creditors or the balance 
due from the customer is the most practical method. It 
involves either a cash receipt or a cash disbursement entry 
and a general entry to cancel the common difference. 

11. Keeping the Subsidiary Ledger in Balance. 

A fundamental principle must be remembered in connection 
with controlling accounts as already has been mentioned. Every 
entry in any of the columnar journals which affects any sub- 



254 COST FINDING FOR ENGINEERS 

sidiary ledger account must be reflected also in the controlling 
account. The use of controlling accounts does not eliminate 
the necessity of proving the accuracy of the account balances 
in the subsidiary ledgers. It only makes possible the prepara- 
tion of a trial balance without including each individual 
customer's and creditor's account balance. At the end of each 
month, therefore, the amount of the balances in the subsidiary 
ledgers or other record must be proved with the control account 
balance. If any difference exists, it must be traced through 
verification of: 

a. Summary postings to the control accounts. 

6. Current postings to the subsidiary ledger. 

c. Unpaid voucher file with the record of vouchers unpaid in 
the date paid column of the voucher register. 

d. Mathematical computations as to addition and sub- 
traction in each subsidiary ledger account. 

12. Advantages in the Use of Controlling Accounts. 

The chief advantages in using controlling accounts are as 
follows : 

1. Eliminates the necessity of including every detail account 
balance in the trial balance. Only the controlling account 
balances are shown. 

2. Serves as a check on the subsidiary ledgers or some 
other record it controls. If a trial balance is obtained, but 
the subsidiary ledger or other record does not balance with its 
controlling account, then one or more account balances are 
wrong in the subsidiary ledger or other record. 

3. Localizes errors when there are several controlling accounts 
in operation. 

4. Permits of many manufacturing controls being brought 
into use, the essence of cost accounting. 

13. Preparation of a Trial Balance; Proving the Subsidiary 
Ledger with the Controlling Account. 

The following general ledger accounts are now shown with 
complete postings from all the columnar journals: 

Cash 1 Sales Discount 2 





CR2 


$24,375.24 




CDS 


$9,633.30 



CR2 



$7.60 



CONTROL 


ACCOUNTS WITH CUSTOMERS 255 




Accounts Receivable 3 


Sales SI 




$4,320.68 


Cash 
General Journal 


CR2$ 480.00 
J6 2,418.07 
2,898.07 


Sales, Dept. 


A 


4 


L. Y. Hok 


e, Capital 5 




CR 

SI 


$3,402.84 
1,392.70 
4,795.54 


CR2$10,000.00 


J. C. Lowe, Capital 5 Notes Receivable 7 




CR2 
J6 


$10,000.00 J6 $ 500.00 
1,300.00 J6 2,418.07 
11,300.00 2,918.07 


CR2 $500.00 


Purchase Discount 8 Sales, Dept. B 10 


CD3 


$86.10 


SI $1,398.76 




Accounts Payable 9 


Cash 
General Ledger 


CDS 
J6 


$ 9,719.40 
5,000.00 
14,719.40 


Voucher Register 


V2 $15,011.60 


Sales, Dept. C 11 Freight & Cartage In 12 




si 


$1,529.22 V2 $60.00 


V2 $0.60 


Purchases, Dept. A 13 Purchases, Dept. B 14 


V2 $5,261.22 




V2 $3,510.96 




Purchases, Dept. C 15 Delivery Expense 16 


V2 $4,837.52 




V2 $66.20 




Store Wages 17 Freight Out 18 


V2 $500.00 




V2 $12.20 




Office Fxpense 19 Office Salaries 20 


V2 $26.60 


V2 $125.00 





256 



COST FINDING FOR ENGINEERS 
Rent 21 Store Expense 



22 





V2 


$300.00 







V2 


$62 


50 





Office Equipment 



23 



Delivery Equipment 24 





V2 


$250.00 







J6 


$800.00 





Notes Payable 



25 







J6 


$5,000.00 



A trial balance of the general ledger is shown below: 

FORM 49 

HOKE AND LOWE 

TRIAL BALANCE 

June 30, 19 







Cash 




$14,741 


94 










Sales Discount 




7 


60 










Accounts Receivable (controlling 
















account) 




1,422 


61 










Sales, Dept. A 








$ 4,795 


54 






L. Y. Hoke, Capital 








10,000 


00 






J. C. Lowe, Capital 








11,300 


00 






Notes Receivable 




2,418 


07 










Purchase Discount 








86 


10 






Sales, Dept. B 








1,398 


76 






Accounts Payable (controlling 
















account) 








292 


20 






Sales, Dept. C 








1,529 


22 






Freight and Cartage In 




59 


40 










Purchases, Dept. A 




5,261 


22 










Purchases, Dept. B 




3,510 


96 










Purchases, Dept. C 




4,837 


52 










Delivery Expense 




66 


20 










Store Wages 




500 


00 










Freight Out 




12 


20 










Office Expense 




26 


60 










Office Salaries 




125 


00 










Rent 




300 


00 










Store Expense 




62 


50 










Office Equipment 




250 


00 










Delivery Equipment 




800 


00 










Notes Payable 








5,000 


00 










$34,401 


82 


$34,401 


82 











CONTROL ACCOUNTS WITH CUSTOMERS 



257 



The individual accounts in the accounts receivable subsidi- 
ary ledger appear as follows after the postings are complete: 

Accounts Receivable Ledger 



E. D. Wise and Co. 50 Nix Novelty Corp. 51 




Si 


$200.00 




CR2 


$200.00 


SI 


$2,418.07 


JO $2,418.07 


E. C. Normile 52 Faire & Co- 53 




SI 


$280.00 




CR2 


$280.00 


SI 


$55.42 




Janitor's Supply Co. 54 H. C. Crane 55 




81 


$910.20 




SI 


$456.99 





The balances taken from the accounts receivable subsidiary 
ledger are as follows: t 

Schedule of Accounts Receivable 

June 30, 19 

Faire & Co $ 55 . 42 

Janitor's Supply Co 910 . 20 

H. C. Crane 456.99 

$1,422.61 



Since this total checks with the Accounts Receivable con- 
trolling account balance, it is proof that this subsidiary 
ledger is in control. 

An inspection of the unpaid voucher file should reveal the 
following vouchers unpaid at June 30, 19 : 

Schedule of Accounts Payable June 30, 19 
Voucher 75 Office Equipment Corp $250 .00 

79 Standard Supply Co 26.00 

80 Globe Refinery 16.20 

$292.20 



Here, again, the unpaid vouchers as a total agree with the 
Accounts Payable controlling account in the general ledger. 

Questions 

1. What necessitates a subdivision of the general ledger? 

2. Define a subsidiary ledger. 



258 COST FINDING FOR ENGINEERS 

3. Name some of the most common subsidiary ledgers which are used. 

4. Enumerate the advantages arising from the use of subsidiary 
ledgers. 

5. Define a controlling account. 

6. Is it necessary to have a separate controlling account to control 
each accounts receivable subsidiary ledger? 

7. What are the sources of the postings to the general ledger con- 
trolling account, Accounts Receivable? 

8. What fundamental principle must be kept in mind when postings 
are made to subsidiary ledgers controlled by a general ledger controlling 
account? 

9. What are the postings which are made from the sales journal? 

10. Why is it that the general ledger will not be out of balance as a 
result of a summary posting made from the sales journal to the Accounts 
Receivable controlling account, while at the same time detailed postings 
are made to the individual customers' accounts in the accounts receivable 
subsidiary ledger? 

11. What are the postings which are made from the cash receipts 
journal? 

12. What are the sources of the postings to the Accounts Payable 
controlling account? 

13. What are the postings which are made from the voucher register? 

14. What are the postings which are made from the cash disbursements 
journal? 

15. What are the postings which are made from the general journal? 

16. What procedure must be taken if the subsidiary record is not in 
balance with its general ledger controlling account? 

17. What is the best method of handling the accounts of a customer 
and a creditor both of whom happen to be the same party? 

18. What are the advantages in using controlling accounts? 



CHAPTER XVII 

THE VOUCHER SYSTEM 

1. The Voucher. 

A successful factory accounting system will have a voucher 
system as its most important operation division. A voucher 
is a written order for the payment of money attested to by 
someone in authority as being proper and correct, A voucher 
lists the definite transactions which are covered by the author- 
ized payment, and names the accounts affected. The detailed 
items vouched for are as follows. 

a. The goods ordered and listed on the vendor's invoice 
have been received. 

6. The cost price is correct, and the price extension has 
been verified. 

c. The proper distribution has been made. That is, the 
account^ and amounts affected have been entered properly on 
the voucher. 

d. The authority for payment has been approved. 

Each one of the above details should be certified by a 
different employee. In this manner, an effective check and 
control is maintained over the expenditures. Where authority 
rests with different employees, one checking against the other, 
a system of internal check exists. Every accounting system 
should be devised so that internal checks will safeguard the 
company's interests. 

An illustration of a voucher is shown in Form 50. 

Each voucher is given a consecutive number. There are 
various systems of numbering in use. Invoices are frequently 
received after the first of the month which represent expendi- 
tures applicable to the preceding month. Some arrangements 
must be made whereby invoices received after the first of the 
month but applicable to the preceding month will not become 
confused with the invoices for expenditures applicable to the 
current month. To keep the vouchers separate for the dif- 
ferent months numerous methods are employed. Two 

259 



260 



COST FINDING FOR ENGINEERS 
FORM 50 







Voucher No. 1013 




Invoices 




Creditor Blake Supply Co. 




Date 


Remarks 


Amount 














Check Date 


Jan. 22 




$1,074 


92 




Number 12 Paid Jan. 31, 19 














Account Amount 












Purchases Raw Material 


$958 


32 












Direct Labor 
















Indirect Labor 
















Freight In 
















Fuel and Power 
















Factory Expense 


116 


60 












Machinery Maintenance 
















Salesmen's Salaries 
















Traveling Expenses 
















Advertising 
















Shipping Expenses 
















Office Salaries 
















Telephone 
















Office Expense 






Total 


$1,074 


92 




Postage 














Officers Salaries 






Purchase Discount 


21 


50 










Cash Disbursement 


$1,053 


42 












Distribution Approved: 


Signature 
Payment Approved: 










Signature 










$1,074 


92 



methods in use will be mentioned. The number of each 
voucher made in January may be given the prefix "A," 
February "B," etc. If there are never more than 1,000 
vouchers a month the numbers from 1,000 to 1,999 may be 
used for January; 2,000 to 2,999 for February, etc. 

There is no uniformity in practice as to when vouchers are 
prepared. Some concerns make it a practice to perpare a 



THE VOUCHER SYSTEM 261 

voucher for each invoice, especially when the discount is to be 
deducted within the discount period. Other concerns make up 
their purchase vouchers only once or twice a month. One 
voucher may include many invoices if they are payable to the 
same creditor. The nature of the purchases and payment 
policy of the plant influence the manner in which vouchers 
are prepared. 

After a voucher has been prepared and its distribution 
approved, it should be recorded in the voucher register. The 
entry provides a permanent record. The voucher in some 
cases is made out in duplicate. The duplicate may be used 
as the authority for the entry, while the original follows 
another trail in the office routine. 

After the voucher has been recorded in the register, it is 
then filed for payment. If a discount is to be taken, the 
voucher will be filed under the date when it must be paid. 
Different methods of handling purchase discounts in connec- 
tion with the voucher system are discussed in Sec. 11 of this 
chapter, 

2. The Voucher System. 

All modern business concerns make use of the voucher 
system as their most important business control. The voucher 
system is the master key to the scheme of controlling a cost 
accounting system. 

Voucher systems consist of the following books and records: 

a. The Voucher (described above). 

6. A Voucher Register. 

c. A Voucher Distribution Summary Sheet. 

d. An Operating Ledger. 

e. A Voucher Check. 
/. A Check Register. 

g. A Voucher Index of Creditors. 

These forms, records, and books are described in detail in 
the following sections of this chapter. 

3. Some Plant Activities Preceding the Use of the Voucher. 

Before a description is given of the recording of the voucher 
in the voucher register, it is important that such plant activi- 
ties as are involved in the use of the voucher should be con- 
sidered. Here is a typical series of steps that follow in 



262 COST FINDING FOR ENGINEERS 

sequence in the plant prior to the preparation of the voucher. 

a. A request for an estimate on a job is received. 

6. The engineering department prepares the estimate and 
blue prints for the order. 

c. The prepared estimate is accepted by the customer, and a 
sales order is received in the plant. 

d. A bill of materials, as made up from the blue print, is 
sent to the store room where it is checked with the material 
on hand. 

e. In event adequate material is not on hand, the stores 
department places a purchase order with the purchasing agent. 

/. The purchasing agent sends out requests for bids on the 
material wanted. 

g. A purchase order is placed by the purchasing agent, 
usually with the lowest bidder. This order specifies the 
date the material is wanted, and that the shipment must 
plainly show the purchase order and requisition numbers. 

h. The material is shipped and the shipper mails an invoice 
to the plant's purchasing agent. 

i. When the material is received in the store department, the 
receiving clerk fills out a "receiving slip/' usually containing 
t,he following information : 

(1) Purchase order number. 

(2) Purchase requisition number. 

(3) The name of the transportation company delivering the 
shipment. 

(4) The number of containers received. 

(5) The total weight of the material received. 

(6) The itemized list of the material received. 

(7) Amount of transportation charges. 

j. The receiving slip is sent to the accounting department, 
where it is compared with the invoice. 

fc. If no discrepancy is found to exist between the invoice 
and the receiving record, a voucher is then made from the 
invoice. The invoice is usually attached to the voucher. 

4. The Voucher Register. 

The voucher register is a columnar book of original entry 
in which a record of all expenditures is made. It is the out- 
growth of the purchase journal, and was described briefly in 
the two preceding chapters. It is immaterial what the nature 



THE VOUCHER SYSTEM 263 

of the expenditures may be. The important thing to remem- 
ber is that every expenditure must be entered in the voucher 
register before payment can be made. All liabilities for 
payment should be vouchered and recorded as soon as they 
become known, irrespective of when payment will be made. 
There are innumerable forms of the voucher register. The 
number of account columns used in the voucher register differs 
with the needs and nature of the business. Some firms analyze 
their expenditures in great detail in the voucher register, 
using a separate column for each expense account which is 
frequently affected by transactions. Voucher registers with 
50 to 70 columns are not so prevalent as they were some years 
ago. The present-day tendency in industrial Accounting is to 
substitute comparatively few control account columns for the 
many individual account columns. 

An old style voucher register with 21 columns is shown in 
Form 51. Limitation of space prevents showing a 60-column 
model. The illustration, however, is typical of the nature 
of the detailed analytical column voucher register. 

A purchase discount column is sometimes shown in the 
voucher register. Obviously, it is to record the savings made 
by taking advantage of the discounts allowed on the invoices. 
This saving constitutes a decrease of expense or an increase in 
income, hence, is considered as a credit. The provision for a 
purchase discount column in the voucher register depends 
upon the invariable act of taking all discounts offered (see 
Sec. 11 in this chapter). 

The voucher register shown in Form 52 could well be sub- 
stituted for the one shown in the preceding illustration. A 
voucher register of the following type involves the use of 
controlling accounts for different expenses. The manner in 
which the expense controlling accounts function is described 
in Chap. XX. 

6. The Voucher Distribution and Summary Sheet. 

A voucher distribution and summary sheet may be used in 
connection with the voucher register having expense control- 
ling account columns. These summaries are shown in the 
illustrations on pages 265, 266 and 267 



264 



COST FINDING FOR ENGINEERS 







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4 



THE VOUCHER SYSTEM 
FORM 53 



265 



T 
Manufacturing Cost . 


Voucher Distribution and Summ 
jcount For the m 


ary 

,, , January, ,. 
onth of - 19- 






Purchases Raw Materials 


Direct Labor 


Indirect Labor 


Voucher 
or Journal 
Number 


Amount 


Voucher 
or Journal 
Number 


Amount 


Voucher 
or Journal 
Number 


Amount 


1000 
1004 
1011 
1013 
1015 
1018 


$1,947 
1,383 
3,019 
958 
547 
1 , 756 


90 
10 
72 
32 
22 
90 

16 


1010 
1019 


$2,952 
3,092 


20 
50 

70 


1010 
1019 


$ 548 

593 


75 
50 

25 


$9,613 


$6,044 


$1,142 


Freight In 


Fuel and Power 


Factory Expense 


Voucher 
or Journal 
Number 


Amount 


Voucher 
or Journal 
Number 


Amount 


Voucher 
or Journal 
Number 


Amount 


1002 
1015 


$ 196 

(Cr.) 5 


53 
18 


1001 


$ 562 


55 


1012 
1013 
1020 


$ 56 

116 
9 


08 
60 
75 


$ 191 


35 


$ 562 


55 


$ 182 


43 


Machinery Maintenance 






Voucher 
or Journal 
Number 


Amount 


Voucher 
or Journal 
Number 


Amount 


Voucher 
or Journal 
Number 


Amount 


1009 


$ 99 


83 














$ 99 


83 



266 



COST FINDING FOR ENGINEERS 
FORM 53a 



Voucher Distribution and Summ 

Marketing Expense . . ^ AU 
- Account For the m 


ary 
onth of ? ailu . a1 ^ 19.- 




Salesmen's Salaries 


Traveling Expense 


Advertising 


Voucher 
or Journal 
Number 


Amount 


Voucher 
or Journal 

Number 

% 


Amount 


Voucher 
or Journal 
Number 


Amount 


1010 
1019 


$1,200 
1,200 


00 
00 


1014 


$ 116 


64 


1003 
1020 


$ 178 

10 


56 
00 


$2,400 


00 


$ 116 


64 


$ 188 


56 


Shipping Expense 


Freight Out 


Warehouse Wages 


Voucher 
or Journal 
Number 


Amount 


Voucher 
or Journal 
Number 


Amount 


Voucher 
or Journal 
Number 


Amount 


1005 


$ 101 


32 


1002 


$ 55 


70 


1010 
1019 


$ 375 

375 


00 
00 


$ 191 


32 


$ 55 


70 


$ 750 


00 



THE VOUCHER SYSTEM 
FORM 53b 



267 



> 

Administrative Expenai 


Voucher Distribution and Summ 
. Account For the m 


ary 
onth of J?. n . uar y' . . 19 






Office Salaries 


Telephone and Telegraph 


Office Expense 


Voucher 
or Journal 
Number 


Amount 


Voucher 
or Journal 
Number 


Amount 


Voucher 
or Journal 
Number 


Amount 


1010 
1019 


$ 955 
950 


00 
50 


1016 
1020 


$ 27 

8 


83 
90 


1005 
1020 


S 181 

15 


72 
85 


$1,905 


50 


$ 36 


73 


$ 197 


57 


Postage 


Officers' Salaries 




Voucher 
or Journal 
Number 


Amount 


Voucher 
or Journal 
Number 


Amount 


Voucher 
or Journal 
Number 


Amount 


1006 
1020 


$ 41 

10 


50 
00 


1010 
1019 


$1,000 
1,000 


00 
00 

00 








$ 51 


50 


$2,000 



268 COST FINDING FOR ENGINEERS 

In addition to entering the amount affecting the expense 
control accounts in the voucher register, the amount is also 
entered in the specific expense account or accounts on the 
voucher summary sheet. In this manner, the total of each 
detailed expense item is summarized monthly. Credits to 
any of the accounts are entered in "red," which eliminates 
much lost space in providing credit columns. 

6. The Operating Ledger. 

The operating ledger is used in connection with the voucher 
register involving the use of expense controlling accounts and 
the voucher summary sheet. The operating ledger is of course 
subsidiary to the general ledger. It may be substituted for 
the expense ledgers mentioned in Chap. XX. The monthly 
summaries from each account shown in the voucher distribu- 
tion and summary sheet are transferred to the operating ledger. 
A form of the operating ledger is shown on page 269. 

It may be seen that only a few sheets provide for the detailed 
expense items for the entire year. An operating ledger of 
this type also furnishes the necessary information in con- 
venient form for the monthly income, profit and loss state- 
ment as well as for the complete year, except for the closing 
inventory. If a perpetual inventory is not maintained, a 
physical inventory of the unused materials must be taken. 
An offsetting red ink credit must be placed in the subsidiary 
material accounts in the voucher distribution and summary 
sheet for the new inventory amounts. 

7. The Voucher Check. 

When a vouchered invoice is to be paid, it is removed from 
the file and a check is made out for the net amount. Invoices 
vouchered prior to payment, obviously, will carry a series of 
numbers varying from the check numbers used. This is true 
because an invoice offering a discount ordinarily will be paid 
within the discount period. Other vouchers for invoices with 
terms of "net 30 days" may be made up before, but paid after 
the vouchers covering invoices upon which discounts have 
been taken. 

To avoid two sets of numbers, many concerns combine the 
voucher and check, making it serve both purposes. The 



THE VOUCHER SYSTEM 



269 



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270 



COST FINDING FOR ENGINEERS 



voucher check is usually made out at the time the voucher is 
prepared. When this is the procedure, it implies that the 
purchase discount is invariably taken, and the purchase dis- 
count column then appears in the voucher register. Obviously 
if purchase discounts are not taken regularly, the voucher 
check cannot be made until the time of payment arrives, 
because the amount of the check would not be definitely 
known. Under the latter condition it is better to have the 
purchase discount column in the check register. There are 
innumerable forms of the voucher check. One form is shown 
as follows: 

FORM 55. VOUCHER CHECK 



In payment of 
Invoices: 



Date 



Jan. 22 



Total 



Less Discount 

Net 



Amount 



$1,07492 



$1,07492 
21 50 



$1,05342 



Pittsburgh, Pa,......--..'-?...... 19 

The Empire Engineering Company 



XT 12 
No. 



,, . ., , , Blake Supply Co, .1,053.42 
Pay to the order of -- ~- $- 



One Thousand Fifty-three and 

To the Schenley 
National Bank 



-Dollars 



Ruling sometimes is shown on the reverse side of the check 
which provides for the information pertaining to the invoices 
paid. The endorsed check becomes a receipt for payment of 
the specified invoices. 

Where the voucher check is used, arrangements must be 
made to provide for the account distribution which appears 
in detail on the voucher. The plan frequently adopted is to 
make the distribution directly from the invoice. A rubber 
voucher stamp as illustrated below is stamped on each invoice. 
The information called for is then inserted from which the 
distribution of expenditures is made. 



THE VOUCHER SYSTEM 
FORM 56. VOUCHER STAMP 



271 



Voucher No. 1013. 




Price Checked L '...?:..... 


HI -rr 

Extension Checked ...'...~:. 




Charge: Account 


Amount 


Purchases Raw Material 
Factory Expense 


$ 958 32 
11660 


$1,074|92 


Distribution 
Verified C> R> Paid: 


12 


Date 
Payment Check 
Approved ..*.* 







272 



COST FINDING FOR ENGINEERS 

FORM 57. VOUCHER CHECK 
(Original) 





VOL 

Pay 
One 

In f 
To 


RIVER BARGE COMPA 

icher No. 
1013 

Pittsburgh, ] 
to the order of Blake Supply Company 


NY 

Check No. 
12 

Pa January 31 1Q 




$1,053.42 
!--~Dollars 


Thousand Fifty-three and 4 


i*i< 




ull payment of account as shown in statement attached. 
ALLEGHENY NATIONAL BANK 


Treasurer 


RIVER BARGE COMPANY 
Statement of Account 


Date 
of invoice 


Description 


Amount 


Total 


Jan. 22 


Less discount 2 % 


$1,074 

21 


92 
50 


$1,05342 






Detach and retain for your file 



THE VOUCHER SYSTEM 



273 



FORM 57a. VOUCHER CHECK 

(Duplicate) 

Inside 



RIVER BARGE COMPANY 

Voucher No. Check No. 

1013 ^ 12 

TV** u t- r> January 31 , rt 
Pittsburgh, Pa. - 19 

~ . .. , - Blake Supply Company A l,053.42 
Pay to the order of r, ".....- $.. 

One Thousand Fifty-three and 42/100 _ 

Dollars 

I certify that the amounts shown below are correct; that the invoices are 
attached hereto after having been examined and approved by the proper persons; 
and that the expense was incurred for the benefit of the River Barge Company. 

Plant Auditor 
Statement of Account 



Date 
of invoice 



Description 



Amount 



Total 



Jan. 22 



Less discount 2 % 



$1,074 
21 



$1,0534 



274 



COST FINDING FOR ENGINEERS 



FORM 57b. VOUCHER CHECK 

(Duplicate) 

Outside 





R] 
Voucher 
Date 


VER BARGE COMPANY 

XT 1013 


Jan. 22, 


19 


Check IS 
Date Pa 


lo 12 


10 


Jan. 31, 




Payable 


Blake Supply Company 




Voucher Distribution 


Account 
number 


Account 


Amount 




Purchases Raw 
Material 
Factory Expense 


$ 958.32 
116.60 


Total 
Purchase Discount 
Net 


$1,074.92 
21.50 


SI, 053. 42 



THE VOUCHER SYSTEM 275 

Some firms give the voucher checks a series of numbers 
known as " treasurer's check numbers/' which differ from the 
voucher check number. The purpose of so doing is to facilitate 
the monthly reconciliation of the cash balance in the bank. 

8. The Check Register. 

The check register serves the same purpose as the cash 
disbursements journal, in that it records the payment of all 
cash. The check register is invariably used where the voucher 
system is in operation. Its use implies that all expenditures, 
regardless of their nature, are charged to their proper accounts 
through the voucher register. No current postings are made 
from the check register. The only postings are summary ones 
made as credits to the Cash and Purchase Discount accounts 
and as a debit to the Accounts Payable control account. A 
check register is shown in Form 58. 

Entries are made in the check register from the original 
checks or from a duplicate record of the check. 

9. Voucher Index of Creditors. 

The use of a voucher register eliminates the use of a credi- 
tor's ledger. The Accounts Payable control account in the 
general ledger may be proved by comparing the balance of 
this account with the total unpaid vouchers. 

Some business concerns wish to have a record of the volume 
of business done with each of their creditors. In the absence 
of an accounts payable ledger, they operate a voucher index of 
creditors. A loose leaf card record shows the amount paid 
each creditor. Columns for the date paid and the voucher 
number give an index to the invoices filed in alphabetical 
arrangement. Some index records do not have a column for 
the amount. The record may be filled in from the voucher 
check or from the check register, usually from the latter source. 

10. Peculiar Problems in Connection with Some Vouchered 
Invoices. 

An invoice is supposed to be paid as originally vouchered. 
There are a few exceptions to the rule due to circumstances 
arising as follows : 

a. A voucher made, with the discount deducted, is not paid 
in time to take advantage of the discount. 



276 



COST FINDING FOR ENGINEERS 



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THE VOUCHER SYSTEM 
FORM 59 



277 



Name of Cr< 
Addn 


Voucher Index 'of Creditors 
,. Blake Supply Company 






26 Norwich Place, Springfield, 111. 




Date 


Voucher 
Number 


Amount 


Date 


Voucher 
Number 


Amount 


Date 


Voucher 
Number 


Amount 


Jan. 22 


1013 


$1,074 


92 



































































































































































































































6. A return is made, or an allowance is received, on some 
invoice which has been vouchered. 

c. A partial payment may be made on a vouchered invoice. 

d. A voucher covering payment of an invoice may be 
cancelled by giving a note as a deferred payment. 

e. A creditor's invoice vouchered for payment may be used 
to offset a charge against the same creditor as the result of 
making a sale to him. 

(a) Discount Lost after Voucher Is Prepared. 

The entry in the voucher register for the original voucher 
was as follows: 



Voucher Register 

(Cr.) (Cr.) 



(Dr.) 





Voucher 
Number 


Accounts 
Payable 


Purchase 
Discount 


Purchases 






5113 


$1,960 


00 


$40 


00 


$2,000 


00 





278 



COST FINDING FOR ENGINEERS 



Failure to pay the voucher within the time limit would 
necessitate the cancellation of the voucher for $1,960, and the 
preparation of a new one for $2,000. If the voucher register 
has a sundry column, the correction is quite easily made. It 
would be as follows in the voucher register. 



(Cr.) (O.) 



Voucher Register 

(Dr.) 







Pur- 




Sundry 


Voucher 


Accounts 


chase 


Pur- 




Number 


Payable 


Dis- 


chases 














count 




Dr. 


Cr. 


L. F. 


Account 


5406 


$2,000 


00 










$1,960 


00 








Accounts Payable 
















40 


00 








Purchase Discount 



The entries in the sundry debit column, when posted, correct 
the postings from the original entry. The $1,960 posted as a 
debit to the controlling account offsets the credit of $1,960 
entering the controlling account from the accounts payable 
column in the first entry. The $40 debit to the Purchase Dis- 
count account also offsets a like amount when the summary 
credit posting is made from the purchase discount column. 

(&) Purchase Return or Allowance after Invoice Has Been 
Vouchered. 

The original transaction was entered in the voucher regis- 
ter as shown in (a) above. 

A $300 allowance was received from the creditor after 
voucher 5113 was entered, but before the voucher was paid. 
Voucher 5113 must be cancelled and a new one prepared. 

The correction may be made in the voucher register as 
shown in (a) above. 

Voucher Register 

(Cr.) (Cr.) (Dr.) 







Pur- 




Sundry 


Voucher 


Accounts 


chase 


Pur- 




Number 


Payable 


Dis- 


chases 














count 




Dr. 


Cr. 


L. F. 


Account 


5406 


$1,666 


00 


$34 


00 






$1,960 


00 








Accounts Payable 
















40 


00 








Purchase Discount 




















$300 


00 




Purchases Re- 


























turned and Allow- 


























ances 



THE VOUCHER SYSTEM 



279 



The new voucher 5406 gives adequate explanation for the 
two debits and credit appearing in the sundry column. The 
discount of $34 need not be shown in the purchase discount 
column since the correction could, necessarily, be made by 
showing a debit of $6 in the sundry column for the discount 
unallowed on the purchase allowance of $300. Actually a 
$34 discount was earned instead of a $40 discount. Hence, 
the correcting entry as illustrated is better. 

(c) Partial Payment Made on a Vouchered Invoice. 

The same original transaction is used in this illustration as 
was shown in the preceding cases. The exception is that one 
half of the amount of the invoice covered by voucher 5113 
is to be paid, deducting the discount, and the balance to be 
paid at a later date. 



(Cr.) (Cr.) 



Voucher Register 

(Dr.) 







Pur- 




Sundry 


Voucher 


Accounts 


chase 


Pur- 




Number 


Payable 


Dis- 


chases 














count 




Dr. 


Cr. 


L. F. 


Account 


5406 


$980 


00 


$20 


00 






$40 


00 








Purchase Discount 
















960 


00 








Accounts Payable 


5407 


1,000 


00 










1,000 


00 








Accounts Payable 



The debits posted from the sundry column cancel the post- 
ings of the original entry, namely, a $40 credit to the Pur- 
chase Discount account, and $1,960, credit to the Accounts 
Payable account. Voucher 5406 will be paid, taking advantage 
of the discount of $20. Voucher 5407 will be paid for the 
amount of $1,000 at some later date. 

(d) Issuing a Note Covering a Vouchered Invoice. 

In event a vo^chered invoice is not paid at the end of the 
original entry period, it may be necessary to issue a note. 
This means that the payment of the invoice is to be deferred 
until some future date. The vouchers must be cancelled, 
a note issued, and a new voucher made up at the time the note 
matures. 



280 



COST FINDING FOR ENGINEERS 



The original entry was made in the voucher register as 
shown in (a) above. 

The entry to cancel voucher 51 13 "would be made in the 
general journal since no new voucher will be prepared until 
the note becomes due. The correcting entry would be as 

shown below 

General Journal 

(Dr.) (Dr.) (Cr.) 





Accounts 


General 






General 






Payable 


Ledger 






Ledger 






$1,960 


00 








Longhorn Leather Co. 














$40 


00 




Purchase Discount 




















Notes Payable 


$2,000 


00 
















To cancel voucher 5113 in 




















giving a 60-day 6 % note, 




















dated Feb. 16, 19 , cover- 




















ing their invoice of Jan. 16, 




















19 









The summary debit posting from the accounts payable 
column contains the $1,960 which cancels the credit of like 
amount posted from the voucher register to the Accounts 
Payable controlling account. The current debit posting to 
the Purchase Discount account cancels the credit of like 
amount reflected in the summary posting of the purchase dis- 
count column from the voucher register on voucher 5113. 

(e) Voucher ed Invoice Used to Offset Customer's Account. 

A purchase of $2,000, subject to terms of 2/10 n/30, was 
made from the Longhorn Leatjher Company. One week after 
the receipt of the invoice for $2,000, a sale amounting to 
$ 647.55 was made on account to the same company. 

The entry in the voucher register would be the same as 
shown in the four preceding illustrations for voucher 5113. 
The entry in the sales journal would be as follows: 

Sales Journal 

(Dr.) (Cr.) 











Sales 








Accounts 










Receiv- 
able 


Dept. A 


Dept. B 


Dept. C 


I 1 

I Longhorn Leather Company 




$647 


55 


$647 


55 








1 1 



















THE VOUCHEE SYSTEM 



281 



Settlement of the account payable was made in time to 
take advantage of the discount, after applying the account 
receivable balance with the same concern as an dffset. It 
would be necessary to cancel voucher 5113, and make up a 
new voucher. An entry in the voucher register would record 
the transaction as follows: 

Voucher Register 

(Cr.) (Or.) (Dr.) 











Sundry 


Voucher 


Accounts 


Purchase 


Pur- 




Number 


Payable 


Discount 


chases 


















Dr. 


Cr. 




Account 


5406 


$1,312 


45 










$1,960 


00 








Accounts Payable 




















$647 


55 




Longhorn Leather 


























Company (A.R.) 



The sundry debit posting of $1,960 to the Accounts Payable 
controlling account cancels the credit of $1,960 on voucher 
5113. The difference between the voucher 5113 and the 
amount the Longhorn Leather Company owes is $1,312.45, 
the amount of voucher 5406. The sundry credit of $647.55 
must be posted to the individual customer's account in the 
accounts receivable ledger as well as to the Accounts Receivable 
controlling account in the general ledger. 

11. Purchases Discounts and the Voucher System. 

The principle as to the location of the purchase discount 
column has already been mentioned. If the practice is invari- 
ably to take all purchase discounts, they should be listed in 
the voucher register; if irregularly taken, they should be 
listed in the check register. 

There is one disadvantage in recording purchase discounts 
in advance of actually earning them. At the end of each 
accounting period, an adjustment must be made for all pur- 
chase discounts entered in the voucher register applicable 
to invoices which have not yet been paid. The necessary 
adjusting entry is made as follows: 



282 



COST FINDING FOR ENGINEERS 
General Journal 



(Dr.) 



(Cr.) 



General 
Ledger 



Account 
Payable 



$17 



57 



Purchase Discounts 

Accounts Payable (control) 

To show full liabilities on unpaid 
vouchers at the date of closing. 



$17 



At the beginning of the following period the same entry i 
reversed. The reversing entry automatically adjusts th 
Accounts Payable controlling account in accordance wit! 
the discounts earned on invoices vouchered in one period an- 
paid in the following period. 

Some accounting systems have been designed to show th 
amount of purchase discount lost. The method probabl; 
has some merit if the company's financial condition is sue 
that it could easily take advantage of all discounts. Th 
failure to take any discounts pins the responsibility on th 
person having charge of the payment to creditors. Such 
plan would also show what amount of discounts was lost per: 
odically as a result of not having a sufficient amount of cash o 
hand to pay all the invoices within the discount perioc 
Under this scheme, the expenses are recorded in the vouche 
register at a net figure with full liability for accounts payable 
and a debit to the Purchase Discount account for the diffei 
ence. A section of a voucher register with columns for th 
above scheme appears as follows: 



Voucher Register 
(Cr.) 



(Dr.) 



(Dr.) 





Voucher 
Number 


Accounts 
Payable 


Purchase 
Discount 


Purchases 


















$13,647 


19 


$473 


10 


$13,174 


09 















THE VOUCHER SYSTEM 



283 



As the vouchered invoices are paid, the discounts taken 
are recorded in the check register. If the discounts taken 
amounted to $256.90 on the accounts payable of $13,647.19, 
all of which were paid, then, discounts in the amount of 
$216.20 were lost. 

Check Register 

(Dr.) (Or.) (Or.) 







Voucher 
Number 


Check 

No. 


Accounts 
Payable 


Purchase 
Discount 


Cash 
























$13,647 


19 


$256 


90 


$13,390 


29 



The Purchase Discounts account reflects the discount lost 
after postings have been made from both journals. 

Purchase Discounts 







Voucher Register 




$473 


10 






Cash Disbursements 
Discounts Lost 




$256 
216 


90 
20 


$473 


10 


$473 


10 
















~~~ 



12. Advantages of the Voucher System. 

One of the chief advantages of the voucher system is that 
it makes possible the establishment of various cost accounting 
controls. Some of these controls are described in Chaps. 
XIX and XX. Other possible advantages are : 

1. Expenditures regardless of their nature are recorded in 
one journal. 

2. Eliminates the necessity for a creditor's ledger. 

3. Receipts for paid bills are furnished when the voucher 
check system is used. 

4. Constitutes an effective control and check over the spend- 
ing agencies of the business by requiring approval of different 



'284 COST FINDING FOR ENGINEERS 

parties for purchase price, proper classification of expenditures, 
and payment of the voucher. 

In addition to the above-listed advantages, the voucher 
register establishes control accounts for raw materials or 
stores, manufacturing, marketing, and administrative expenses. 
The details of these controls are found in the operating 
departments of the plant. Tl^e manner in which these con- 
trols function within the operating departments is briefly 
described in Chaps. XIX and XX, but the cost details must 
be deferred until the operation of a cost system is described 
in a cost accounting textbook. 

Questions 

1. Define a voucher. 

2. What facts are attested to by a voucher? 

3. What is an internal check? 

4. Describe some systems for numbering vouchers. 

5. Why should the vouchers covering expenditures for each separate 
month be identified by some scheme of numbering ? 

6. When are vouchers prepared? 

7. Of what use is a voucher after it has been prepared? 

8. Enumerate the major plant activities, in their order, which take 
place prior to the preparation of a voucher. 

9. Contrast the voucher register having many detailed expense 
columns with one having expense controlling account columns. 

10. What is the function of a voucher summary sheet? 

11. What use is made of the operating ledger? 

12. Describe a voucher check and illustrate its use. 

13. What is a voucher stamp and when is it used? 

14. What is a check register? 

15. What is the function/of a voucher index of creditors? 

16. What fact determines whether the purchase discount column 
should appear in the voucher register or check register, or in both books? 

17. What are some peculiar problems met with in connection with 
some vouchered invoices? 

18. What are considered the most important advantages of a voucher 
system? 



CHAPTER XVIII 
COST ELEMENTS 

1. Accounting for a Manufacturing Concern. 

Many references have been made to the manufacturing 
plant in connection with different accounting principles and 
practices. There are certain peculiar and particular develop- 
ments which must be described in detail in order to obtain 
an adequate understanding of factory costs. For example, 
a manufacturing plant usually has three different types of 
inventories as compared with the merchandise inventory of 
a trading concern. 

Expenses, entirely separate from selling and administrative 
expenses, called " manufacturing overhead expenses/' arise 
in the plant. Before developing the principle of manufactur- 
ing control, it is necessary to have an understanding of what 
is meant by manufacturing overhead expense and plant 
inventories. 

2. Manufacturing Cost 

Manufacturing cost is divided into three divisions termed 
the "elements of cost." These elements are: 

1. Raw Materials. 

2. Direct Labor. 

3. Manufacturing Overhead or Indirect Expenses. 

Different products require different portions of these respec- 
tive elements. Two decades ago the bulk of the cost of pro- 
duction was comprised of material and direct labor. The 
advent of machinery since that time has displaced men to a 
tremendous degree. As a result, labor costs have decreased 
while overhead costs have increased in proportion. 

3. Raw Material an Element of Cost* 

Material cost comprises the cost of all raw materials entering 
directly into the production of a commodity. There is par- 
ticular significance attached to the phrase " directly into." 

285 



286 COST FINDING FOR ENGINEERS 

Some materials enter indirectly into the manufacture of a prod- 
uct and are included in the overhead or indirect expense. The 
bulk of material used in production, however, is a direct charge. 
Raw material is the known quantity which enters directly into 
and is charged to each unit of production. An example or 
two will illustrate the difference between direct and indirect 
materials. 

The number of board feet of lumber that enters into the 
production of an office desk may be readily ascertained. 
It might not be practical to figure the cost of the glue to join 
the various sections of each desk. The lumber represents a 
direct or raw material cost. The cost of the glue is considered 
an indirect material, the total cost of which is charged as an 
indirect expense. 

A plant engaged in manufacturing gears and pinions con- 
siders as its raw material the steel, iron, or brass blanks which 
are cut, faced, drilled, and, perhaps, beveled. The cutting 
compounds used in the cutting and drilling operations are an 
indirect material charge or overhead expense. It would be 
impractical to endeavor to determine how many gills or 
gallons of compound had been consumed while machining 
specific pieces. 

There is much to be said about the control of the raw mate- 
rial inventory. Adequate control of raw material is primarily 
a cost problem. Both physical and financial control of raw 
material inventory are based upon a properly designed account- 
ing system. 

4. Labor an Element of Cost 

Workmen who fashion, shape, assemble, or in some other 
manner work up the raw material into the finished product 
are called " direct laborers." Direct labor cost comprises 
the time of all workmen engaged in the operations necessary 
to produce each unit. Many operations in several depart- 
ments may be required before the raw material assumes the 
finished state. Many operators or workmen may be engaged 
successively toward completion of the product, but as long as 
they are engaged in some operation, their labor is classified 
as direct labor. 

All plant labor may be divided into two classes, direct 
and indirect. Indirect labor is always classified as an over- 



COST ELEMENTS 287 

head expense. Indirect labor represents the time of the work- 
men in a plant any portion of which cannot be allocated 
easily to a particular unit or article produced. This class of 
workmen includes the cleaners, sweepers, labor gang, oilers, 
repairmen, power house attendants, storeroom laborers and 
clerks, foremen and superintendents, etc. 

An illustration will clearly show the distinction between 
the two types of factory workmen. Contrast direct labor 
with indirect labor in a machine shop. The time of the work- 
men performing the operations of drilling, boring, slotting, and 
planing a driving box housing constitutes direct labor. The 
time spent by the workmen in sweeping up the borings, in 
oiling, and in repairing the shafting represents indirect labor. 
The time of the direct laborers is charged, as such, to a specific 
job or order number. The time of the sweepers, repairmen, 
and other indirect laborers constitutes an expense charged to 
all orders pro rata as they pass through the plant. Indirect 
labor, therefore, becomes an overhead expense. 

The control of labor as a cost element should also embody a 
system of internal check. The chief features of labor control 
are time keeping, labor distribution, payroll analyses and 
wage systems. Together they constitute a real problem in 
cost accounting. 

6. Manufacturing Overhead Expense an Element of Cost. 

Manufacturing overhead expense includes all manufacturing 
expenses exclusive of the raw material and direct labor. 
Overhead expense represents the cost of all supplies, indirect 
labor, and miscellaneous manufacturing expense, any part 
of which can not be allocated readily to any one unit of 
production or any one type of service. The total cost of 
these expense items is prorated in some arbitrary manner to 
the units of goods produced. The process of prorating this 
cost is termed " overhead " or "burden distribution. " Over- 
head expenses may be variable or relatively fixed. 

The variable expenses include such items as indirect labor, 
heat, light, power, packing supplies, spoiled material, factory 
supplies and any other manufacturing expense which may 
vary with output or production. 

The relatively fixed overhead expenses include depreciation, 
taxes, and insurance on the manufacturing plant and equip- 



288 COST FINDING FOR ENGINEERS 

ment. If a concern rents its factory buildings, the rent is 
considered as a fixed overhead expense. The term " relatively 
fixed" is used because expenses of this nature are incurred 
whether productive operations are carried on 24 hours a day 
or whether the plant is idle. The modification " relatively " is 
used because any item classified under this heading may 
fluctuate slightly from year to ye&r, due to causes without the 
control of the business. The tax rates, the insurance rates, 
or the rent may vary from year to year, adjusted by the 
government, by the insurance companies, or by the landlord, 
yet they represent expense to be paid under any circumstances. 
Depreciation rates, too, may be changed for some bona fide 
reason. 

The control of overhead expense may be exercised through 
the use of the manufacturing budget. The principles of 
applying the overhead cost to the job or the unit of the 
commodity produced present another real problem in cost 
accounting proper. 

The three elements of cost have beeto outlined briefly in 
order to portray the result of combining them. Raw material 
cost, direct labor cost, and manufacturing overhead expense cost 
are combined to ascertain the cost of goods manufactured. The 
cost of goods manufactured as compiled by a manufacturing 
plant is comparable to the purchases cost in a trading concern. 
The cost of a manufactured article usually cannot be ascer- 
tained in so short a period of time as one day. Some costs 
may be determined daily, but in the majority of diversified 
industries it requires several days, possibly weeks, or, in some 
cases, months, before the final cost of production is known. 
This leads to the question of the second inventory peculiar 
to the manufacturing industry, known as the "work in process 
inventory." 

6. The Work in Process Inventory. 

Where a period of several days or more is required to com- 
plete an order, some plan must be provided to keep a record 
of the elements of cost which accumulate during the process 
of manufacture. The combination of the direct labor applied 
in working up the raw material together with an added amount 
of overhead expense incurred from day to day gives a value 
to the goods in a partially finished stage. These elements of 



COST ELEMENTS 289 

cost accumulating from day to day, prior to completion of 
the units of product, create the value known as the "work in 
process inventory." This inventory is peculiar to manu- 
facturing concerns where the operations to complete the prod- 
uct require several days or more. In some manufacturing 
establishments there is no work in process inventory problem, 
due to the small span of time necessary between the time the 
raw material enters the production until it becomes finished 
goods. Illustrations of such manufacturing industries are 
ice plants, steam-heat plants, blast furnaces, butter plants, 
and coal mines. In industries of this nature only a fraction 
of the 24-hour day is required to convert the raw material into 
the finished product. 

In the majority of industries, however, the work in proc- 
ess inventory presents an important problem. Important 
because there must be a record of accumulated cost of material, 
labor, and overhead expenses during the space of time inter- 
vening between the raw material stage and the finished goods 
stage. Where there is the necessity for assembly, fabrication 
aging, or numerous and intricate operations in production, 
accounting for the work in process inventory is advisable. 
Typical illustrations in which a work in process inventory 
would be found are furniture, machinery, steel and iron 
products, automobile, clay products, and electrical equip- 
ment plants. It is imperative to account for the work 
in process inventory on the books in order to have a capital 
account representing a value into which the expenses or 
elements of cost may be transferred as they are incurred. 
In the work in process stage of production, expenses are 
being converted into a current asset. The goods in process 
inventory is a running or perpetual inventory of the ele- 
ments of cost which have entered into production, but have 
not been completed in the form of finished goods. Thus, 
at the close of any month or accounting period when the 
financial statements are prepared, the value of the work in 
process is readily available. In reality it is composed of 
elements of cost or expense capitalized. The balance in the 
Work in Process Inventory account, while shown as an asset 
at the end of any accounting period, really represents a defer- 
ment of expense to the next accounting period. What is 
considered the new inventory at the close of one month or 



290 COST FINDING FOR ENGINEERS 

fiscal period, becomes the old inventory (an expense) at the 
beginning of the next month or fiscal period. It is important 
to visualize the manner in which the work in process functions 
within the plant. 

An illustration will convey the manner in which the work in 
process inventory is handled. In the beginning, certain quan- 
tities of raw material, direct labor, and overhead expenses are 
charged into production (Work in Process Inventory account), 
sufficient to produce five completed steel water tanks during 
June, and three partially completed tanks at the end of the 
same month. The three tanks comprise the Work in Process 
Inventory account balance at June 30. During July, addi- 
tional amounts of raw material, direct labor, and overhead 
expense are charged to the Work in Process Inventory account 
to complete the three partially completed tanks on hand 
at the close of the preceding month. A sufficient amount 
of the elements of cost also was added during July entirely 
to complete six more tanks and partially to complete four 
others. The nine tanks completed during July are transferred 
to the Finished Goods Inventory account, while the four 
partially completed tanks represent the Work in Process Inven- 
tory account balance at July 31. The flow of goods from the 
raw material stage through the work in process inventory 
to the finished goods inventory is shown in Chart 7. 

The control of the Work in Process Inventory account 
results from properly recording the three elements of cost enter- 
ing into production. This is fundamentally a cost accounting 
procedure. 

7. The Finished Goods Inventory. 

As units of product are completed, they are transferred 
from the Work in Process account to the Finished Goods 
account. The nature of the industry influences the volume 
of finished goods inventory on hand at any time. A plant 
working on specific job orders will usually have a very small 
finished goods inventory. A process order plant where goods 
are made for stock may have a large investment tied up in 
finished goods inventory. 

The volume control of finished goods inventory is brought 
about through a cooperation of the sales and production depart- 
ments. The existence of customers orders of the probability 



COST ELEMENTS 



291 



fl ^ oo - 

? 1 1 2 1 

^ a 




c3 

S 
I 





1-3 

3 



292 



COST FINDING FOR ENGINEERS 



of obtaining orders gage both production and the finished 
goods inventory investment. 

The nature of the accounting system in operation within 
the plant determines the entries made when the finished 
units are sold to customers. The entries under a cost system 
obviously differ from those in a plant where no cost system 
exists. Chapter XXIV illustrates the comparison of journal 
entries pertaining to the elements of cost and inventories 
under non-cost and cost systems. 

The brief presentation of the principles peculiar to factory 
control, as described in this chapter, paves the way for an 
understanding of the development of other factory controls 
merging into revenue accounts, which is the stepping stone 
to cost accounting. 

8. Ascertaining the Cost of Production. 

Accounting for raw materials, direct labor, and overhead 
expense, the three elements of cost, as well as for the raw 
material, work in process, and finished goods inventories per- 



Elements 
Row Mater id H 



CHART 8. RELATION OF COST ELEMENTS 

Statement of the 
Departments Inventories Cost of Production 



Direct Labor- 



Overhead 
Expense 




Raw Material 



Work in Process 



Cost of Raw 
Material Used 



Plus 



Cost of Direct 
Labor Em ployed 

Plus 



Cost of Manufacturing 
Overhead Expense 



-^Finished Goods' 



Equals 



. The Cost of 
' Production 



COST ELEMENTS 293 

mits the determination of the cost of production. The cost 
of manufacturing is usually set up on a separate statement as 
shown in Chap. XXV. At this point, however, it is important' 
that the student should have an understanding of the relation- 
ship between the elements of cost, the three inventories, and 
the cost of production. The chart on page 292 graphically 
portrays this relationship. 

Questions 

1. What are the elements of manufacturing cost? 

2. What is included under the heading of raw material? 

3. Contrast raw materials with factory supplies. 

4. Differentiate between direct labor and indirect labor. 

5. What is the nature of manufacturing overhead expense? 

6. Contrast variable overhead expenses with relatively fixed over- 
head expenses. 

7. What results when the three elements of cost are combined? 

8. What is meant by work in process inventory? 

9. What types of manufacturing establishments are not concerned 
with the work in process inventory? 

10. What is the composition of the work in process inventory at the 
close of any accounting period? 

11. Describe the finished goods inventory. 

12. In what manner does the finished goods inventory differ from 
the merchandise inventory? 



CHAPTER XIX 
INVENTORY CONTROLS 

1. The Importance of Manufacturing Controlling Accounts. 

Controlling accounts, as was illustrated in Chap. XVII, 
are the basis of a modern cost accounting system. The use of 
controlling accounts permits segregation of accounts similar in 
nature in separate ledgers. The subsidiary ledgers may con- 
tain as many detailed accounts as neces'sary without need 
for a general ledger with hundreds of accounts. Flexibility 
is possible with the use of controlling accounts appearing in 
the voucher register, and a cost system may be designed to 
meet any requirement. Through the use of controlling 
accounts, responsibility is centered and fixed on certain 
specifically named individuals. The controlling accounts 
afford the management completed financial statements and 
cost reports much sooner after the closing date than would 
be possible without such accounts. 

Control accounts, therefore, are established for two main 
reasons: 

1. To organize the accounting system so that a maximum 
of transactions may be speedily and accurately accounted for, 
with a minimum of the detail entering the general ledger. 

2. To set up managerial controls, through minor plant 
executives, whereby the responsibility for operations, 
material, labor, and expense costs is ascertained and fixed 
departmentally. 

Some of the most important controlling accounts found on 
the books of a manufacturing plant are as follows: 

1. Inventories. 

2. Expense. 

3. Equipment. 

Description of controlling accounts for inventories is given 
in the following order: 

1. Raw Materials or Stores. 

294 



INVENTORY CONTROLS 295 

2. Work in Process. 

3. Finished Goods. 

2. The Raw Material or Stores Controlling Account. 

a. Advantages of the Raw Materials Perpetual Inventory. 

In a manufacturing plant of even small size, it is almost 
imperative that a perpetual inventory be in operation. A 
perpetual inventory of raw materials serves several purposes: 

1. It affords a record of the quantity of each item of stores 
on hand at any time, which record is important from a produc- 
tion point of view. 

2. It furnishes the value of the stores on hand at any 
time, which figure is necessary in preparing monthly financial 
statements. 

3. It permits a verification of the quantity on hand as 
a means of spotting leakage and pilferage. 

4. It makes the classification of stores a necessity, a practice 
conducive to better stores management. 

5. It prevents the overstocking of raw materials, which, in 
turn* prevents an overinvestment of capital being tied up in 
stores. 

6. The Raw Materials Controlling Account. 

The Raw Materials controlling account is built up from 
postings from the following sources. 

Debits Jrom the: 

(1) Voucher register for the value of all raw materials 
purchased. 

(2) General journal or journal vouchers for any adjustments 
whereby any value is charged back into raw materials. 

Credits from the: 

(1) Raw materials requisitions for the cost of all raw 
materials charged into production or goods in process. 

(2) General journal or journal vouchers for any adjustments 
whereby any value is credited to raw materials. 

The chief source of the debits to the Raw Materials con- 
trolling account is from the voucher register. When raw mate- 
rials are received the invoices are vouchered and the cost price 
is recorded in the purchases column. For the purpose of illus- 



296 



COST FINDING FOR ENGINEERS 











II 






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INVENTORY CONTROLS 



297 



trating the Raw Materials controlling account, the voucher* on 
page 296 were made up for invoices covering raw materials: 

At the end of each month the total cost of raw materials, as 
an element of manufacturing cost, is definitely known. In the 
preceding illustration the total of $6,284.07 is posted as a debit 
to the Raw Materials controlling account in the general ledger. 

Sundry debits which are posted to the Raw Materials con- 
trolling account from the general journal or journal voucher 
are as follows: 

1. Salvaged material credited to a production order. 

2. Excess material withdrawn for a production order and 
returned. 

3. Items made by the plant on a shop order for use instead 
of purchasing in the open market. 

The chief source of the credits to the Raw Materials con- 
trolling account, however, is from the requisitions for materials 
withdrawn from the storeroom. 

A stores requisition is an order signed by a foreman or some 
other authorized person directing the storekeeper to deliver the 
amount of raw materials as specified. At the end of each day 
the requisitions are turned over to the accounting department 
where they are priced by a clerk. The price is obtained from 
the stores record ledger in which the perpetual inventory 
and unit prices are shown. 

FORM 61 
Stores Requisition 



NO- OL_ 

Storekeeper: 

Please furnish the following materials and cl 
54721 


Date. J^ 1 .'. 1 ! 


large to Order No. 






Amount 


Items 


Unit 
Price 


Total 


2 gal. 


Black paint 


$4.25 


$8.50 


Signature J. W. Hathaway 



298 COST FINDING FOR ENGINEERS 

A summary credit posting is made at the end of each month 
to the Raw Materials account in the general ledger for the 
total cost of all raw materials issued on the many requisitions. 

Sundry credits are posted to the Raw Materials account from 
the general journal or journal vouchers. These credits will 
arise chiefly from returns and allowances on purchases of 
raw materials. 

The balance in the Raw Materials account at the end of any 
month, after all postings have been made to the account for 
the month, represents the value of raw materials on hand. 
This balance controls the perpetual inventory figure obtained 
from the stores or raw materials ledger. It is the same 
balance which is used at the end of the month as the new 
inventory value in preparation of the statement of income, 
profit and loss, and the balance sheet. 

c. The Perpetual Inventory of Raw Materials. 

A perpetual inventory of raw materials and supplies neces- 
sitates a record of each individual item kept in the storeroom. 
The raw material record may consist of a loose-leaf ledger 
system or a stock-card system. For each individual item of 
raw materials kept in stock, a separate sheet or stores ledger 
card records the following information. 

1. Quantity and value on hand at the beginning of the 
month. 

2. Quantity due on back orders. 

3. Quantity ordered. 

4. Order number. 

5. Quantity received. 

6. Price of last shipment received. 

7. Quantity issued or used. 

8. Price of units issued. 

9. Quantity on hand at the end of the month. 

10. Price of units on hand at the end of thle month. 

11. Value of units on hand at the end of the month. 

12. On release. 

The last item, "on release/' probably needs some explana- 
tion because of its growing usage in industry. Due to antici- 
pation of increase in cost, scarcity, or a favorable price, plants 
make arrangements to buy a year's supply, or more, on one 
order. Such an order provides for the release of the goods 



INVENTORY CONTROLS 



299 



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nning 


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300 COST FINDING FOR ENGINEERS 

by the vendor as the buyer specifies. The column headed 
''on release" registers the quantity still due. The column 
labeled "amount due on back orders " may record the quantity 
to be released, if no other smajl orders are outstanding. 

A monthly summary of the value of all material on hand, as 
shown in the stores ledger, should agree with the balance in 
the Raw Materials account. The stores ledger is thereby 
controlled by the Raw Materials account in the general ledger. 

There are two important problems ever present in connection 
with the control of raw materials from an accounting view- 
point. The first problem is that of charging the material 
issued at the correct unit price. The other problem is that 
of keeping the stores ledger record in agreement with the 
number of units actually on hand. 

There are two different methods of computing the unit 
price at which raw materials should be charged into work in 
process. Where frequent purchases are made at varying 
prices, care must be taken to show that the total cost of goods 
charged into Raw Materials account is again credited for 
like amount when withdrawn from the storeroom and charged 
into production. 

The First-In, First-Out method provides for an accurate 
record. This method functions as follows : 

January purchases 200 units @ . 25 $50 . 00 

February purchases 200 units @ . 26 52 . 00 

March purchases 300 units @ . 255 76 . 50 

The quantity charged into production at the different prices 
would be as follows: 

January requisitions 175 units @ . 25 $43 . 75 

February requisitions 25 units @ . 25 6 . 25 

February requisitions 120 units @ . 26 31 . 20 

March requisitions 70 units @ . 26 18 . 20 

The inventory of these units, at Mar. 31, would consist 
of the following: 

10 units @ 0.26 $ 2.60 

300 units @ 0.255 76.50 

$79.10 

Sometimes the nature of the raw materials or supply item 
is such that it is not expedient to use the first-in ; first-out 



INVENTORY CONTROLS 301 

method. The unit price may be computed by the ^Moving 
Average method as illustrated in form 62. This means that 
the unit price is weighted after each purchase. Each new unit 
price is applied to units used in production immediately after 
a new purchase is 'received. Such a plan operates in the 
following manner. 

New Unit 
v Price 



January purchases 200 units @ . 25 $50 . 00 . 25 

January requisitions 175 " @ . 25 43 . 75 



January 31 balance 25 " @ . 25 $ 6 . 25 

February purchases 200 " @ . 26 52 . 00 



225 ' ' . 25888 $58 .25 . 25888 
February requisitions 145 " @ . 25888 37 . 54 



February 28 balance 80 " @ . 25888 20 . 71 

March purchases 300 " 0.255 76.50 



380 " @ 0.25581 $97.21 0.25581 
March requisitions 70 " . 25581 17 . 91 



March 31 balance 310 " @ 0.25581 $79.30 

A comparison of the first-in, first-out method with the 
moving average method of pricing the inventory shows a 
slight difference in the final inventory. The first method 
which results in a final inventory of $79.10 is accurate. The 
latter method slightly overstates the value of the inventory. 

One of the functions of the storekeeper is to see that fre- 
quent periodical counts are made of each different item in 
stock. This actual count, known as the "physical inventory 
check," is compared with the perpetual inventory or book 
record. The actual count should agree with the stock record. 
If an actual shortage exists, it may have resulted from one of 
the following reasons : 

1. Material has been removed without a requisition having 
been made for it. 

2. Requisition has been lost before record of withdrawal 
has been made in stores ledger. 

3. Material placed in the wrong bin or container. 



302 COST FINDING FOR ENGINEERS 

4. Requisition has been credited against the wrong stock 
record. 

In either of the first two cases, the shortage may be taken 
care of by an inventory loss adjustment described in Chap. IX. 
If the shortage has resulted from misplaced material, sub- 
sequent checking will disclose this fact. If the discrepancy 
has resulted from the fourth reason mentioned above, it is 
more difficult to ascertain. 

If a physical count discloses an amount of any particular 
item in excess of the perpetual record, it may be due to one of 
the following reasons: 

1. Material received was not charged to the perpetual 
inventory or material record card. 

2. Requisition for material issued has been credited erro- 
neously against the stores ledger record card. 

3. Material placed in the wrong bin or container. 
Discrepancies resulting from either of the first two errors 

are not so easy to ascertain. In the latter case, checking of 
the bin in which the material was placed in error will disclose 
the error. 

3. The Work in Process Controlling Account. 

a. The Necessity Jor a Work in Process Control. 

Where production in any plant is of such a nature that a 
work in process inventory exists, some record must be kept 
to' ascertain its money value. A controlling account in the 
general ledger for Work in Process will reflect the accumulated 
value of the elements of cost on partially completed units at 
any time the postings from the books of original entry are com- 
plete. It is necessary to know the work in process inventory 
value at the end of each month for use in the preparation of 
the financial statements. 

6. The Operation of the Work in Process Controlling Account. 

A description of a Work in Process Inventory controlling 
account, first of all, implies the existence of a cost system as an 
integral part of the general accounting system. The con- 
trolling account develops a debit balance as a result of charges 
from the following sources. 



INVENTORY CONTROLS 



303 



Debits from the: 

(1) Three cost elements, namely, 
(a) Raw materials requisitions. 
(6) Direct labor wage tickets, 
(c) Overhead expense rates. 

(2) General journal or journal vouchers for any adjustments 
whereby any value is charged to the Work in Process Inventory 
account. 

Credits from the: 

(1) General journal or journal voucher, 

(a) For the money value of all completed units trans- 
ferred to the Finished Goods Inventory account, or 
(6) Any adjustment whereby any value is credited to 

the Work in Process Inventory account. 
The bulk of the charges to the Work in Process controlling 
account are posted from the daily, weekly, or monthly sum- 
maries prepared from the material requisitions, wage tickets 
and overhead expense applicable to the production orders. 
An illustrative journal entry to show the nature of the debits 
made to the Work in Process control account is as follows : 



General Journal 



(Dr.) 



(Dr.) 



(Cr.) 



(Cr.> 



Work in 
Process 


General 
Ledger 






General 
Ledger 


Stores 
Inven- 
tory 


$1,000 






Work in Process ( 












Raw Materials 




$400 








Direct Labor 


$300 










Manufacturing Overhead 












Expense 


300 










To record the cost of 












the cost elements charged 












into production. 







The chief credits to this controlling account represent the 
cost of the various completed jobs or orders transferred to 
the Finished Goods Inventory controlling account. An 
illustration of this entry, which is made in the general journal, 
or on a journal voucher, is as follows: 



304 



COST FINDING FOR ENGINEERS 
General Journal 



(Dr.) (Dr.) 



(Cr.) (Or.) 





Finished 


General 






General 


Work in 




Goods 


Ledger 






Ledger 


Process 




$876 


78 








Finished Goods 






















Work in Process 






$876 


78 














To transfer the cost of com- 






















pleted goods to the sales de- 






















partment. 











The debit balance in the Work in Process account at the end 
of any month after all postings have been completed consti- 
tutes the value of the three elements of cost charged into pro- 
duction, representing the accumulated cost of uncompleted 
units or jobs. This balance controls the perpetual or running 
inventory of uncompleted jobs or units of a process order. 
A process order is an order run through a plant calling for 
the production of many units of identical nature. The 
production of 350 10" X 10" X 30" mahogany finish radio 
cabinets is an illustration of a process order. The balance 
in the Work in Process controlling account at the end of any 
accounting period is the value used in the preparation of the 
statement of income, profit and loss, and the balance sheet. 

c. The Running Inventory of Work in Process. 

A running or perpetual inventory of work in process, con- 
trolled by the general ledger account, comprises a subsidiary 
record of each job or order in process. The subsidiary record 
usually is in loose card form. A card is made up and given 
a consecutive number for each job. As the raw material is 
requisitioned, direct labor employed, and overhead expenses 
are allocated to each order from day to day, a record is made 
on the card. When an order is completed, its actual cost is 
readily computed. 

A summary of the accumulated charges to the uncompleted 
orders at the end of the month should equal the balance in 
the Work in Process Inventory controlling account. If the 
two amounts are not in agreement, the difference is usually 
the result of neglecting to make the proper records. In the 
event of a discrepancy, it necessitates detailed checking from 
the material requisitions, wage tickets, and overhead charges 



INVENTORY CONTROLS 305 

to the production orders. Another reason for a difference 
between the controlling account and its subsidiary record may 
result from failure to credit the Work in Process controlling 
account with a completed order. 

A Work in Process Inventory controlling account does not 
exist in a manufacturing plant which does not have a cost 
accounting system, or in a plant having cost records which do 
not tie in with the general books. Under these conditions, 
the value of the work in process must be estimated, or com- 
puted from the data accumulated on separate records. 

4. The Finished Goods Inventory Controlling Account. 

a. The Necessity for a Finished Goods Inventory Control. 

As explained in Chap. XVIII, the nature of the manu- 
facturing plant determines the type of finished goods inventory 
record and its control. A controlling account is of utmost 
importance, in any case, for the purpose of supplying a 
monthly balance for use in the monthly financial statements. 
In the absence of a Finished Goods controlling account, or a 
perpetual record, the monthly inventory value must be 
ascertained by one of the following methods : 

1. Actual count with accompanying unit pricing, price 
extension, and recapitulation. 

2. Gross profit method. 

Either of the above methods is inferior to the perpetual 
inventory record controlled by a general ledger controlling 
account. In the first case, the time element makes it pro- 
hibitive, if a value is wanted monthly. The second method 
may be used to compute the value in a few minutes' time, but 
the result is only an estimate. 

The value of the finished goods on hand at the end of any 
period may be arrived at by the Gross Profit method in the 
following manner. Since most business concerns sell their 
goods marked on from cost at a fairly uniform percentage rate 
from year to year, the rate of gross profit will fluctuate very 
slightly during the same periods. Therefore, by multiplying 
the average rate of gross profit ,f or a period of years by the 
known net sales for any given period, the gross profit for that 
period may be estimated. This estimated gross profit deducted 
from the sales gives the estimated cost of goods sold. Deduct 



306 



COST FINDING FOR ENGINEERS 



from the cost of goods available for sale the cost of goods 
sold and the estimated new inventory is the difference. 

From a brief review of substitute methods for ascertaining 
the finished goods inventory value, it may be rightly reasoned 
that the only practical method is the perpetual inventory 
plan. 

6. The Finished Goods Inventory Controlling Account. 

When a perpetual inventory of finished goods is maintained, 
it may be controlled by a controlling account of similar title 
in the general ledger. 

The postings both debit and credit to the controlling account 
come from the general journal or journal voucher as follows: 

Debits for: 

(1) The cost of all complete units transferred from the 
Work in Process Inventory account. , 

(2) Any adjustments whereby any value is debited to the 
finished goods inventory. 

Credits for: 

(1) The cost (to produce) of all goods shipped to customers. 

(2) Any adjustments whereby any value is credited to the 
finished goods inventory. 

The entry shown on page 304 of this chapter illustrates 
the entry which constitutes the bulk of the debits to the con- 
trolling account. The nature of the majority of credit postings 
to the Finished Goods controlling account, coming from the 
general journal or journal vouchers, is as follows: 



General Journal 



(Dr.) 



(Cr.) 





General 






Finished 






Ledger 






Goods 






$876 


78 




Cost of Sales 
















Finished Goods 


$876 


78 












To transfer the cost of 
















completed orders for 
















goods shipped to cus- 
















tomers. 









INVENTORY CONTROLS 307 

The debit balance in the Finished Goods Inventory account 
at the close of any month represents the value of completed 
units or orders which have not been shipped to customers. 
As soon as an order is shipped, its cost is used as the basis for 
making an entry shown in the preceding illustration. At the 
same time the order is shipped and the Finished Goods con- 
trolling account is credited, another entry is made charging 
the customer and crediting Sales account for the selling price. 
This plan is based upon the existence of a cost system (see 
Sec. 9, Chap. XXIV). The debit balance in the Finished 
Goods Inventory controlling account at the close of the month 
is the figure used in the monthly statement of income, profit 
and loss, vand the balance sheet. 

c. The Perpetual Inventory of Finished Goods. 

The nature of the product manufactured determines the 
nature of the inventory record of finished goods. If the plant 
operates on the job-order basis, where each order varies in 
nature and is produced only after the customer has placed his 
order, then no elaborate subsidiary record of finished goods is 
necessary. 

The costs of individual orders covering finished goods which 
have not been shipped represent the value of finished goods on 
hand, and should be in agreement with the Finished Goods 
Inventory controlling account. Such a subsidiary record 
would suffice for a job-order production plant where separate 
records are kept showing the cost of each job. 

In a process order plant where several different products are 
manufactured, a subsidiary record similar to the raw materials 
or store ledger should be maintained. It is sometimes termed 
the " warehouse ledger. " A separate sheet for each different 
item records the monthly receipts from the factory and the 
unit cost, as well as shipments to customers. The value of the 
finished goods on hand at the end of each month will thus be 
shown in the finished goods or warehouse ledger. A recapitula- 
tion of the value of all finished goods on hand at the end of 
the month should be in agreement with the Finished Goods 
controlling account in the general ledger. 

If the finished goods ledger or subsidiary record is not in 
agreement with the controlling account, it may be the result of 
the following conditions: 



308 COST FINDING FOR ENGINEERS 

1. Error of commission or omission in the finished goods 
ledger in recording receipts and shipment of units. 

2. Error in using the wrong cost in crediting the Finished 
Goods account for goods shipped. 

An actual count of all finished goods stock should be made 
periodically to verify the controlling account figure. Usually, 
there is not any material discrepancy unless there has been 
shrinkage by theft. Occasionally a difference may result 
from clerical error and, if such is the case, the difference must 
be located by checking the receipts with the finished order 
costs; and the shipments with the customers 7 invoices. 

Questions 

1. Name some controlling accounts peculiar to a manufacturing 
concern. 

2. What are the benefits derived from controlling accounts used in a 
manufacturing concern? 

3. What are the advantages of a perpetual inventory? 

4. What are the postings made to the x Raw Materials controlling 
account? 

5. Describe the nature and use of a stores requisition. 

6. The balance in the Raw Materials Inventory controlling account 
controls what subsidiary record? 

7. Describe the operation of the stores ledger. 

8. What would be the procedure if the perpetual inventory record 
did not agree with the controlling account? What would cause a vari- 
ance between the two records? 

9. What is the problem of unit prices in connection with a perpetual 
inventory? 

10. What would be the procedure in event a physical count or check 
of the raw materials divulged a shortage when compared with the per- 
petual inventory record? 

11. What are the sources of the postings made to the Work in Process 
Inventory controlling account? 

12. The use of a Work in Process controlling account implies the 
existence of what in the manufacturing concern? 

13. How is the Work in Process controlling account balance proved? 

14. What is the nature of the Work in Process controlling account? 

15. What are the sources of the postings made to the Finished Goods 
Inventory controlling account? 

16. In the absence of a Finished Goods Inventory controlling account, 
how can this inventory value be ascertained? 

17. Describe the finished goods inventory subsidiary record. 

18. What may be the cause of the discrepancy between the finished 
goods inventory subsidiary record and the balance in the controlling 
account? 



CHAPTER XX 
EXPENSE CONTROLS 

1. The Necessity for Expense Controls. 

Many different expense accounts are required by a manu- 
facturing plant to obtain the proper measure of Managerial 
control. The number of expense accounts necessary to obtain 
adequate control in any plant depends upon the nature of the 
product manufactured and the size of the plant. The reasons 
for establishing expense controlling accounts are chiefly to 
furnish figures for budget control and to remove from the 
general ledger many bulky accounts. 

Expense budgets are established to obtain control over 
varioius departments, foremen, minor executives, and other 
divisons or groups having expense-incurring responsibilities. 
Control over raw material and direct labor may be quite easily 
and effectively exercised through standards and measured 
operations. A greater problem is presented, however, in 
obtaining control over expenditures for the many manufactur- 
ing, marketing, and general administrative expense items. 
Proper control over expense consists of keeping within esti- 
mates set up in advance of incurring the actual expenditures. 
Setting up a preestimated amount for various expenses is 
termed a Budget for Expense Expenditure. The expense 
accounts record the actual expenditures as made from day to 
day. Daily, weekly, or monthly comparison of actual expendi- 
tures with the budgeted figure gives the management an 
effective means of control over expenses. 

The principle determining whether there should be con- 
trolling accounts for manufacturing, marketing, and general 
administrative expenses is the number of accounts necessary to 
give the measure of detail wanted within these respective 
divisions of expense. A fundamental principle, in this con- 
nection, is that the number of accounts kept in the general 
ledger should always be kept at the lowest possible minimum. 
By so doing, two time-saving features are effected with the 

309 



310 COST FINDING FOR ENGINEERS 

use of controlling accounts. First, many postings to the 
general ledger are eliminated, thus reducing the possibility 
of error. Secondly, with fewer general ledger accounts, the 
trial balance may be obtained with greater ease and rapidity. 
This is of importance when it is remembered that the prepara- 
tion of monthly financial statements depends upon, first, 
obtaining a trial balance. 

The expense controlling accounts described in this chapter 
are as follows: \ 

1. Manufacturing Overhead Expense. 

2. Marketing Expense. 

. 3. General and Administrative Expense. 

2. Manufacturing Cost Differentiated from Expense. 

\ 

A definite distinction must be made between manufacturing 
cost and manufacturing overhead expense. Manufacturing 
cost is composed of the three elements of cost, namely, raw 
materials, direct labor, and overhead expenses. This concept 
of cost must never be confused with manufacturing overhead 
expense. 

Manufacturing overhead expense is only one of the elements 
of cost, and is purely an operating item. It is sometimes 
known as "overhead expense " or "bur den. " It is composed 
of many items of a varied nature. These miscellaneous manu- 
facturing overhead expense items enter indirectly into the cost 
of the product. All of the expenses of production which can- 
not be allocated to any one unit of product are classified as 
manufacturing overhead expense. 

All manufacturing plants have certain overhead expense 
items in common. For example, indirect labor, taxes, deprecia- 
tion on plant and on factory equipment, factory supplies, power, 
heat, water, insurance, and repairs are some of the most com- 
mon overhead expense items incurred by^ all manufacturing 
establishments. Certain overhead expense items are peculiar 
to the individual plant or industry. Chemical laboratory 
expense would be an overhead expense item peculiar to the 
rubber plant or asphalt industry. Hospital maintenance 
would be an overhead expense item in a plant large enough to 
operate its own hospital, while medical aid would be the term 
used for this overhead expenditure in a smaller plant. 



EXPENSE CONTROLS 311 

3. The Manufacturing Overhead Expense Controlling Account. 

a. The Operation of the Manufacturing Overhead Expense 
Controlling Account. 

The Manufacturing Overhead Expense controlling account 
is developed from the following sources. 

Debits from: 

(1) The voucher register for the total iof all manufacturing 
overhead expense entered in the column labeled by the same 
title. 

(2) The general journal or journal vouchers for any adjust- 
ments whereby any amount is charged to manufacturing 
overhead expense, 

Credits from: 

(1) The general journal or journal vouchers for any adjust- 
ments whereby any amount is credited to manufacturing 
overhead expense. 

After the regular routine has been completed pertaining to 
the checking of the overhead expense items purchased and 
received, a voucher is prepared. The vouchers are then 
entered in the manufacturing overhead expense column 
of the voucher register. At the end of the month the column 
total is posted as a debit to the general ledger controlling 
account, Manufacturing Overhead Expense. 

Debits to the Manufacturing Overhead Expense account, 
entered in the general journal, arise from estimated charges 
for depreciation, compensation insurance, repairs, breakage, 
etc. 

Credits to the Manufacturing Overhead Expense controlling 
account occur infrequently. Errors discovered in the classi- 
fication of expense whereby manufacturing overhead has been 
erroneously charged necessitate a credit to, this controlling 
account. 

At the end of the fiscal period, the debit balance in the con- 
trolling account is closed out by a journal entry to the Profit 
and Loss account where a complete cost accounting system has 
not been installed. In a regular cost accounting text, where 
complete cost procedures are presented, it describes how 
manufacturing overhead expenses are charged into production 
costs by use of estimated overhead rates. 



312 COST FINDING FOR ENGINEERS 

b. The Manufacturing Overhead Expense Subsidiary Record. 

With the use of a Manufacturing Overhead Expense con- 
trolling account some subsidiary record must be available to 
record in detail the many expense items. A special ledger may 
be used in which there is a separate account for each different 
manufacturing expense. 

A more recent development has dispensed with the orthodox 
ledger for expense controlling accounts. The voucher sum- 
mary sheet conveniently displaces the regular form of expense 
ledger. Each month a new voucher summary sheet collects 
the manufacturing overhead expense under separate and specifi- 
cally labeled expense accounts. After all postings have 
been made to the summary sheet at the end of the month, each 
account is totaled, and the totals are then transferred to the 
operating ledger. 

The operating ledger, instead of containing many pages, 
may consist of one sheet if the number of manufacturing 
expense accounts is not too great. 

The total of all manufacturing overhead expense items 
under detailed account captions transferred from the voucher 
summary sheet to the operating ledger, for the first month 
of the fiscal period, should agree with the balance in the Manu- 
facturing Overhead Expense controlling account. The cumula- 
tive total from month to month, in the operating ledger, 
therefore, should agree with the balance in the controlling 
account at the end of any given month. In this manner, 
control is established over the manufacturing overhead expense. 

4. The Marketing Expense Controlling Account. 
a. The Nature of Marketing Expense. 

Marketing expense includes the cost of selling and distribut- 
ing the manufactured product. Marketing expense is some- 
times termed selling or trading expense. Salesmen's salaries 
and traveling expense, freight and express out, and advertising 
are some of the most common illustrations of marketing 
expense. The chart of accounts, at the close of Chap. II, 
shows a more complete list of marketing expenses. 

6. The Marketing Expense Controlling Account. 

The controlling account for marketing expense is built up 
from the following sources. 



EXPENSE CONTROLS 313 

Debits from: 

(1) The voucher register for the total of all marketing 
expenses entered in the column bearing the same caption. 

(2) The general journal or journal vouchers for any adjust- 
ment whereby any amount is charged to marketing expense. 

Credits from: 

(1) The general journal or journal vouchers for any adjust- 
ments whereby any amount is credited to marketing expenBe. 

Expenditures classified as marketing expenses on the 
voucher are entered in the marketing expense column of the 
voucher register. The total of this column is posted at 
the end of the month to the Marketing Expense controlling 
account in the general ledger. 

Other sundry debits to the controlling account not involving 
any present expenditure are made in the general journal or the 
journal voucher. Examples of such items are depreciation, 
taxes, and compensation insurance applicable to the sales 
department. 

Credits to the controlling account are relatively few in com- 
parison with the charges. Some credits are occasionally 
acquired to correct erroneous expense charges to the market- 
ing expense account. 

The balance in the Marketing Expense controlling account 
is closed out at the end of each fiscal period by a general 
journal entry to the General and Administrative Expense 
account or to the Profit and Loss account. 

c. The Marketing Expense Subsidiary Record. 

The detailed record of marketing expenses may be handled 
in an identical manner with the manufacturing overhead 
expenses. A subsidiary ledger for these expenses may be 
used, or the voucher summary sheet and the operating ledger 
as previously described. 

The Marketing Expense control account is proved in the 
same manner as is the Manufacturing Overhead Expense con- 
trolling account. 



314 COST FINDING FOR ENGINEERS 

5. The General and Administrative Expense Controlling 

Account. 

f / 

a. The Nature of General and Administrative Expense. 

Expenses necessary to carry on the functions of the general 
supervisory staff of the enterprise are termed general and 
administrative expenses. Expenses and salaries of the officers 
and executives of a company who formulate, guide, control, 
and supervise the general policies come under this division. 
Incidental expenses in connection with their activities are 
likewise general and administrative expense charges. A 
few examples are office supplies, salaries, rent, postage, 
telephone, telegraph, subscriptions, and dues. A more com- 
prehensive list of expense accounts is shown in the chart of 
accounts at the close of Chap, II. 

6. The General and Administrative Expense Controlling Account. 

A debit balance results in the General and Administrative 
Expense controlling account after postings have been made 
from the following sources. 

Debits from: 

(1) The voucher register for the total of all general and 
administrative expenses entered in the column headed by the 
same title. 

(2) The general journal or journal voucher for any adjust- 
ment whereby any amount is charged to the General and 
Administrative Expense account. 

Credits from: 

(1) The general journal or journal vouchers for any adjust- 
ment whereby any amount is credited to the General and 
Administrative Expense account. 

Expenditures for general and administrative expenses, 
when vouchered, are entered in the controlling account column 
for this particular type of expense. The total of this column is 
posted as a debit at the end of the month to the general ledger 
controlling account. 

Sundry debits to the controlling account from the general 
journal or journal voucher are for estimated expenses appli- 



EXPENSE CONTROLS 315 

cable to the administrative and general office division of the 
plant. 

Sundry credits to the controlling account are usually cor- 
rections to or refunds on expense items previously charged to 
the account. 

The debit balance of the General and Administrative Expense 
controlling account, likewise, is closed to the Profit and Loss 
account at the close of each fiscal period 

c. The General and Administrative Expense Subsidiary Record. 

A record of the general and administrative expense in detail 
may be handled along the same plan as provided for the manu- 
facturing and distribution expense groups. The General 
and Administrative Expense controlling account is proved 
in the same fashion as is the Manufacturing Overhead Expense 
controlling account. 

6. Other Expense Controlling Accounts. 

The size of the .plant and the number of service departments 
required determine the necessity for establishing subcontrol- 
ling accounts under the manufacturing, marketing, or adminis- 
trative divisions. For example, Manufacturing Overhead 
Expense may have subcontrols for indirect supplies, labora- 
tory, development, power, housing, and many other special 
activities. The Marketing Expense controlling accounts may 
be split into subcontrols for selling, warehousing and storage, 
and delivery expense. 

Whatever the subdivisions of controlling accounts may be 
under a main expense division, the general principles of 
establishing and maintaining the control are the same. The 
voucher register may be extended so that a separate column 
records the charges to each individual expense group. The 
details are then posted from the voucher to the individual 
expense account in the operating ledger. 

A form of voucher, register designed for a multicontrol 
expense system is illustrated below. Due to space limitations 
the illustration is limited to manufacturing expense which is 
typical of the other expense controlling accounts. 



316 



COST FINDING FOR ENGINEERS 



bO 

a 



A 3 & 

I 22 



s 






co 

<> 




IS 



o 



o 03 



o 6 



o 
*> 

o 



EXPENSE CONTROLS 317 

The operating ledger, under this plan, would be subdivided 
in such a manner that the accounts pertaining to any one 
division would be grouped together. For example, the 
accounts recording the stores expense might be as follows: 

a. Raw Material Purchases. 

Inspection and Testing. 
Unloading and Unpacking. 
Store Clerks' Wages. 
Repairs to Storeroom Equipment. 

L s^j.i CI.L T-I j Storeroom Supplies and Expense. 

6. Other Stores Expense < -~ . , . a & 

* ' Depreciation on Storeroom Equipment. 

Watchmen's Wages. 
Storekeeper's Salary. 
Storekeeper's Traveling Expense. 
^Storekeeper's Miscellaneous Expense. 

The Raw Material Purchases account may be a sub- 
controlling account, controlling the stores or material ledger. 
The other expenses of the storeroom are placed under another 
subcontrolling account named Other Stores Expense. 

The column headed Direct Labor as a controlling account 
may control any number of different direct labor accounts 
classified as to operations or departments. 

The subcontrolling account, Power Plant, under, Manufac- 
turing Overhead Expense, will control the expenses pertaining 
to this indirect service, such as wages of engineers, stokers, 
oilers, and laborers in the power house; fuel, lubricants, repairs, 
and maintenance of the power plant. 

Maintenance and Repairs as a subcontrolling account 
controls the labor, material, and other miscellaneous expenses 
of the entire plant. 

The Miscellaneous Factory Expense account as a subcontrol 
of the manufacturing overhead expense records such expenses 
as cleaning supplies, ice, and water for drinking purposes, 
stationery and printed forms, tool room expense if not handled 
as a separate subcontrol, and other miscellaneous manufac- 
turing expenses not properly classified under more specifically 
named overhead expense accounts. 

Indirect Labor as a subcontrolling account under manufac- 
turing overhead expense has listed under it the various indirect 
labor expense accounts for those occupations which cannot 
properly be charged to some more specific* expense accounts, 
such as other stores expense, power plant, etc. Examples of 



318 COST FINDING FOR ENGINEERS 

work classed as indirect labor are general cleaning, sweeping, 
floating labor gang, etc. 

The possibilities of expense control are thus seen to be 
unlimited with the voucher register as the all important "key" 
to the establishment of the controls. 

Controlling accounts also may be established along depart- 
mental lines within the factory. For example, in a foundry 
the manufacturing process may be divided in accordance with 
the main operations or steps in production. Separate control- 
ling accounts may be set up for the following: 

1. Metals. 

2. Melting Department. 

3. Molding Department. 

4. Core Making Department. 

5. Cleaning Department. 

6. General Foundry Expense. 

The Melting Department controlling account would record 
the total costs ^ of that department. The voucher summary 
would provide for a record of the detailed expenses such as: 

a. Labor. 

6. Fuel. 

c. Supplies. 

d. Cupola Relining Labor. 

e. Cupola Relining Material. 

Melting labor expense in turn may be split into other sub- 
divisions. The cost of any number of different kinds of labor 
may be recorded in separate accounts. 

7. Operation of Manufacturing Overhead Expense Controlling 
Account 

The operation of a controlling account for manufacturing 
overhead expense as described in Sec. 3 of this chapter, is 
shown in the following illustration: 



EXPENSE CONTROLS 
FORM 64 



319 



Voucher Register V86 


(Or.) (Or.) (Dr.) 








Paid 
























Manufac- 


Date 


Payable to 


Voucher 
Number 




V 


Accounts 
Payable 


Purchase 
Discount 


turing 
Overhead 












Date 


Check 
Number 








Expense 


19 


























July 


2 


Knowles Corp. 


7000 








$ 353 


33 


$ 3 


57 


$ 356 


90 




3 


U. S. Supply Co. 


7001 








46 


73 




47 


47 


20 




4 


Penn Power Co. 


7002 








162 


23 






162 


23 




6 


Mahoney and Co. 


7003 








584 


28 


11 


92 


596 


20 




6 


Jones and Reed 


7004 








5 


19 






6 


19 




7 


Standard Iron Corporation 


7005 








1,860 


45 


18 


79 


1,879 


24 




9 


Penna. Rwy. Co. 


7006 








163 


47 






163 


47 




10 


G. D. Piper 


7007 








207 


01 


2 


09 


209 


10 




11 


Oakland Fuel Corp. 


7008 








465 


88 






465 


88 




13 


Sheet Metal Works 


7009 








4,179 


27 






4,179 


27 




14 


G. R. Esterly 


7010 








346 


50 


3 


50 


350 


00 




17 


Western Electric Co. 


7011 








75 


90 






75 


90 




re 


Payroll 


7012 








658 


12 






658 


12 




20 


Newlin Iron Co. 


7013 










98 








98 




21 


Lake Lumber Co. 


7014 








2,171 


39 


44 


31 


2,215 


70 




25 


R. D. Ayare Co. 


7015 








917 


19 


18 


72 


935 


91 




28 


McClamrock Co. 


7016 








156 


90 






156 


90 




31 


Standard Bolt & Nut Works 


7017 








4,984 


72 






4,984 


72 




31 


Osier & Nelson 


7018 








3,929 


50 


39 


69 


3,969 


19 




31 


B. & 0. Rwy. 


7019 








210 


10 






210 


10 




31 


Payroll 


7020 








750 


00 






750 


00 
















$22,229 


14 


$143 


06 


$22,372 


20 



After each voucher covering a manufacturing overhead 
expense item has been entered in the controlling account 
column of the voucher register, the same amount is entered 
in the specific expense account or accounts in the voucher 
summary. 



320 



COST FINDING FOR ENGINEERS 
FORM 65 



Voucher Distribution and Summary 
Manufacturing Overhead! Expenses Month July , 19 








Factory Supplies 


Miscellaneous Factory 
Expense 


Indirect Labor 


Voucher or 
Journal 
Number 


Amount 


Voucher or 
Journal 
Number 


Amount 


Voucher or 
Journal 
Number 


Amount 


7005 
7009 
7014 
7017 
7018 


$ 1,879 
4,179 
2,215 
4,984 
3,969 


24 
27 
70 
72 
19 


7001 
7004 
7013 
J154 


$47 
5 

Cr. 


20 
19 
98 
98 


7012 
7020 


$ 658 

750 


12 
00 




$17,228 


12 




$52 


39 




$1,408 


12 


Fuel 


Royalties 


Experimental and 
Development 


Voucher or 
Journal 
Number 


Amount 


Voucher or 
Journal 
Number 


Amount 


Voucher or 
Journal 
Number 


Amount 


7008 
7015 


$ 465 

935 


88 
91 


7010 


$350 


00 


7000 
7003 


$356 
596 


90 
20 




$1,401 


79 




$350 


00 




$953 


10 


Freight In 


Repairs to Machinery 


Compensation Insurance 


Voucher or 
Journal 
Number 


Amount 


Voucher or 
Journal 
Number 


Amount 


Voucher or 
Journal 
Number 


Amount 


7006 
7019 


$163 
210 


47 
10 


7011 


$75 


90 


J154 


$397 


24 




$373 


57 




$75 


90 




$397 


24 



EXPENSE CONTROLS 
FORM 65. (Continued) 



321 



Depreciation on 
Machinery 


Power Purchased 


Fire Insurance 


Voucher or 
Journal 
Number 


Amount 


Voucher or 
Journal 
Number 


Amount 


Voucher or 
Journal 
Number 


Amount 


J154 


$416 


93 


7002 


$162 


23 


J154 


$190 17 




$416 


93 




$162 


23 




$190 17 


Repairs to Buildings 


Depreciation on Buildings 


Medical Expense 


Voucher or 
Journal 
Number 


Amount 


Voucher or 
Journal 
Number 




Amount 


Voucher or 
Journal 
Number 


Amount 


7016 


$156 


90 


J154 


$286 


40 


7007 


$209 10 




$156 


90 




$286 


40 




$209 10 



Postings also are shown in the voucher summary which have 
been made from the general journal. These postings are made 
from the monthly general journal adjusting entries for manu- 
facturing overhead expense items which cannot be entered 
properly in the voucher register. Such adjusting journal 
entries are for prepaid and accrued expense items, corrections, 
and depreciation. At the same time, the individual amounts 
shown in each entry also are used to build up a total which 
is posted to the controlling account. The entries shown in 
the following general journal might well be shown in journal 
voucher form. Illustration of the latter form has been omitted 
because the general journal portrays the assembly of figures 
for the controlling account in a clearer manner. 

The total of each account in the voucher summary, after all 
postings for the month have been made, is transferred to 
the operating ledger. The sum of all manufacturing overhead 
expense accounts in the operating ledger for any given month 
or months must equal the balance in the control account for 
the same period of time. The balance for the month of July 
in the account on page 324 is $23,661.96, the total manu- 
facturing overhead expense. 



322 



COST FINDING FOR ENGINEERS 



~t 

*- /-> 

f. 

V 

o 
a 

o 
>- 

! 

0) 

o 

X-X 

Q 

4 
Q 

v^ 


f! 
II 


i 






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fl8 S ^ H 
J ^^ ^^ 


00 
OS 


00 


3 




O H 


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(N Oi Tt* *-* 


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Oi t i OO O3 

co -^ e* r* 


o 

r- 




19 
July 31 
Compensation Insurance 
Reserve for Compensation Insurance 
Estimated amount based upon July factory payroll. 
Depreciation on Machinery 
Reserve for Depreciation on Machinery 
Depreciation applicable to production for the month of July. 
Depreciation on Building 
Reserve for Depreciation on Building 
Depreciation applicable to production for the month of July. 
Fire Insurance 
Prepaid Insurance 
Insurance applicable to production for the month of July. 
Miscellaneous Selling Expenses 
Miscellaneous Factory Expenses 
To correct an error in distribution of voucher 7013. 


5 




i i> 










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| 1 1 


^ co o ^ 


S 


t* co co o 

Oi 00 O> 
CO ^J* CQ *"t 




T-l 


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00 

o 


S 







CO 



EXPENSE CONTROLS 



323 



1 

H 



! 

8 

O 

Q 
I 



I 



1 



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"S 



to 



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o 



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eo 



Accoun 



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I 


TS 






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324 



COST FINDING FOR ENGINEERS 



The manufacturing overhead expense controlling account for 
the preceding illustration is shown as follows: 

General Ledger 
Manufacturing Overhead Expense 



19 










19 










July 


31 




V86 


$22,372.20 


July 


31 




J154 


$ 0.98 




31 




J154 


1,290.74 




31 


Balance 




23,661.96 










$23,662.94 










$23,662.94 


Aug. 


1 


Balance 




$23,661.96 













The debit balance of $23,661.96 in the control account 
proves the operating ledger total for the month of July and 
represents the manufacturing expense for that month. 

The only figure for manufacturing overhead expense appear- 
ing in the trial balance is the balance in the control account. 
The operating ledger, however, furnishes the detail which 
appears in the statement of the cost of production. 

Questions f 

1. What are the advantages of having controlling accounts for 
different groups of expenses? 

2. Differentiate between manufacturing cost and manufacturing 
expense. 

3. What are the postings made to the Manufacturing Overhead 
Expense controlling account? 

4. Describe two different subsidiary records which may be used to 
record the manufacturing overhead expense detail. 

5. What is the nature of marketing expenses? 

6. What are the sources of the postings made to the Marketing 
Expense controlling account? 

7. What is the nature of general and administrative expenses? 

8. What are the postings made to the General and Administrative 
Expense controlling account? 

9. What disposition is made of the balances in the different expense 
controlling accounts at the end of the fiscal year? 

10. Explain what is meant by a "system of subcontrol accounts." 
Give an illustration. 



CHAPTER XXI 
EQUIPMENT CONTROLS 

1. The Nature of Equipment Accounts. 

Controlling accounts for fixed assets are as important as 
controlling accounts for expenses. This is true because of the 
composite nature of most equipment accounts. Accounts 
covering equipment are so composite in nature that they record 
many dissimilar items, as, for example, an Office Equipment 
account. This account records the cost of desks, chairs, type- 
writers, adding machines, filing cabinets, safes, cash registers, 
gas stoves, water coolers, and many other items. A Machinery 
account for a glass factory shows the cost of unloading equip- 
ment, automatic presses, carrying out conveyors, fans, motors, 
leers, storage-conveyor system, drill presses, and lathes. 
A Building account often includes such different items as 
frame buildings, temporary structures, and concrete and brick 
structures, A road contractor includes in his Equipment 
account steam shovels, ditch diggers, ditch fillers, concrete 
mixers, steam rollers, road scrapers, dump cars, locomotives, 
and a host of miscellaneous minor tools. The above illustra- 
tions show the complexity that may exist in the variety of items 
making up equipment accounts. Other equipment accounts, 
however, may be so highly specialized as to include but one 
type of equipment. Illustrations of this type are specific 
equipment accounts for automobile trucks, horses, mules, 
wagons, shafting and belting, patterns and drawings. 

2. The Necessity for Equipment Controlling Accounts. 

An equipment account in which is recorded the cost of 
many units, either similar or dissimilar, presents the following 
problems which may not be apparent at first thought. 

1. New units or replacements may be acquired at any time 
during the fiscal period. 

2. There may be no uniformity as to the cost of even like 
units, especially if purchased in different years. 



32* COST FINDING FOR ENGINEERS 

3. The different items have different spans of estimated 
useful life. 

4. Units even though purchased at the same date may be 
sold, scrapped, or traded in at different dates. 

5. A different rate of depreciation may apply to various 
items within the same account. 

6. Some provision must be made in order to know when an 
asset has been completely depreciated. 

7. In event of fire, to facilitate insurance adjustment, a 
detailed record of each unit of equipment damaged or destroyed 
is invaluable. 

To include all of the above information applicable to one 
particular group of assets within the bounds of a single account 
would be adding confusion to crowded figures. The cost of an 
asset is about all that can be placed conveniently in an equip- 
ment account. To subdivide- the Office Equipment or any 
other fixed asset account into several other general ledger 
accounts each recording the cost of a specific type of equipment 
is not expedient. It is absolutely necessary, on the other hand, 
to have a record which will readily reveal the information 
itemized in the above seven statements. 

It is necessary to know the cost, the date of purchase and 
disposal, and the amount of accumulated depreciation on each 
unit in each equipment account, if accurate depreciation 
figures are to enter into the cost reports, if accurate financial 
statements are to be prepared, and to provide for an 
accurate amount of gain or loss for Federal income tax require- 
ments, when disposal is made of each unit of equipment. 
The general ledger accounts for various groups of equipment 
cannot, with any degree of completeness, record the required 
detail. Hence, the necessity of subsidiary records. The 
various general ledger equipment accounts, in recording the 
cost of the units only, serve as controlling accounts. They 
control the equipment ledger or plant ledger, as it is sometimes 
called. 

3. Establishing Equipment Controls. 

No peculiar problem is presented in establishing and main- 
taining equipment controls. The various equipment accounts 
are developed as a result of postings being made from the 
following sources. 



EQUIPMENT CONTROLS 327 

Debits from: 

(1) The voucher register. 

(a) Covering the invoice cost of all items of equipment. 
(6) All other capital costs incidentally involved in placing 
the asset in readiness for use. 

(2) The general journal or journal vouchers. 

(a) Covering any adjustments whereby the equipment 
account has been credited erroneously. 

Credits from: 

(1) The cash receipts journal. 

(a) For the sale or scrap value received when a unit is sold. 

(2) The general journal or journal vouchers. 

(a) Upon disposal of a unit, for the amount of depreciation 
which has been charged off the particular unit, for which a 
corresponding amount has been accumulated in the related 
depreciation reserve account. 

(6) For any amount of undepreciated cost that is not 
covered in full by the selling value or exchange value received, 
which is reflected in such an account as Loss on Sale of 
Capital Assets. 

(c) For any adjustment whereby the equipment account 
has been charged incorrectly. 

There are no special columns in any of the above-mentioned 
journals for equipment accounts. There is no necessity for 
control account columns in the journals because equipment 
purchases and disposals occur with relative infrequency. All 
transactions pertaining to equipment, therefore, are entered 
in the general ledger columns of the journals. 

4. The Equipment Ledger. 

In contrast with the simplicity in establishing the equip- 
ment controls is the detail involved in maintaining the sub- 
sidiary records. Each class of equipment, such as machinery, 
automobiles, office and store furniture and fixtures, horses, 
wagons, buildings, patterns, drawings, etc., obviously, is made 
up of a varying number of units. A separate ledger sheet or 
card should record the data pertaining to each unit. A history 



328 COST FINDING FOR ENGINEERS 

of each unit from the date of its entrance into the business 
until it is disposed of is recorded in the equipment register. 

In order that the individual units may be identified with 
their subsidiary record, a system of numbering maybe adopted. 
Various methods of labeling the units of equipment are in 
practice in order to identify them with their book record. 
Metal tags may be riveted or brazed on machines ; automobiles 
may have numbers painted thereon; furniture and fixtures may 
be stenciled with a number in some inconspicuous place; 
buildings may be identified by address or location; and 
patterns and drawings marked by number on metal tags. 

A rather complete history of each unit in the subsidiary 
record would include the following information: 

1. Name of general class of equipment. 

2. Description of specific unit. 

3. Number of unit. 



4. Location. 

5. Vendor's name. 

6. Vendor's number. 

7. Voucher number covering purchase 

8. Date acquired. 

9. Estimated useful life. 

10. Estimated scrap value. 

11. Invoice cost. 

12. Freight and cartage cost. 

13. Installation cost. 

14. Total original cost. 

15. Additional cost of improvements or betterments. 

16. Depreciation rate per annum. 

17. Annual amount of depreciation. 

18. Monthly amount of depreciation. 

19. Accumulated depreciation in reserve account. 

20. Net book value of unit. 

21. Date of disposal of unit. 

22. Disposition of unit. 

23. Value received (trade-in or cash). 

24. Repair charges. 

A model form for the equipment ledger covering the above 
items is shown in the form on page 329. 

In the illustration, it will be noted that a betterment capital- 
ized at the beginning of the eighth year is presumed to have 



EQUIPMENT CONTROLS 



329 











.0 












Amoun 






Number Ml 

$50.00 
30 


Monthly Charge Si^^O^ $10.00 
;ived 


Repair Charges 


e 

1 

3 

*o 
* 






2 *Q\ 

s" 5 - 1 
; 


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ft 


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Amount t 


Depreciat 


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it Account 


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51 51 



330 COST FINDING FOR ENGINEERS 

increased the life of the asset by two years. This results in a 
change in the depreciation rate for the remaining five years 
from $150 to $120 a year. 

The space provided for a record of repair charges is valuable 
in that it clearly shows when the cost of repairs is reaching a 
too high peak. Engineers recognize the fact that there is a 
certain point in the life of every asset when it is desirable to 
dispose of the unit. The cost of repair charges is a big factor 
in making the decision as to whether it is time to trade in or 
sell the unit. While the repair record is of great value theoret- 
ically, in practice it is dispensed with frequently. The 
reason is that the cost of gathering the information monthly 
is considered excessive. 

5. Proving the Controlling Account. 

With the use of the columns labeled " depreciation reserve" 
and "net book value/' rapid verification with the control- 
ling account is possible. The total of the "equipment" 
column of the subsidiary record should contain the same items 
as appear as debits in the various equipment controlling 
accounts in the general ledger. For example, if there were 
thirty units of machinery, the total of the "equipment" 
columns of the thirty subsidiary sheets should equal the total 
debit balance in the Machinery account in the general 
ledger. 

Again, at the end of each year, the accumulated amounts in 
the depreciation reserve columns of the subsidiary records are 
readily verified with the general ledger valuation accounts, 
Reserve for Depreciation. The total of all the largest accumu- 
lated amounts in this particular column should be equal to the 
total credits in the depreciation reserve account related to 
the asset. 

The total of the balances in the net book value columns of 
each subsidiary sheet may be verified also with the net book 
value of the particular asset appearing in the balance sheet at 
the end of any fiscal period. 

By these proofs, the subsidiary records are verified with the 
controlling accounts periodically. Any discrepancy between 
the two records is invariably due to an item of depreciation 
misstated or omitted in the subsidiary record, or to some 
erroneous mathematical computation in the record. 



EQUIPMENT CONTROLS 



331 



The amount of repairs has no relation to the proof of the 
control. 

6. Collecting Data for Statement Preparation. 

When subsidiary equipment records are maintained, they 
furnish accurate information pertaining to the deprecia- 
tion charges. In a going concern where the financial state- 
ments are prepared only once a year, the individual records 
reveal the annual depreciation charge. 

Executives and managers always are eager to know the result 
of the business of each month. It is not deemed expedient 
to record the monthly depreciation charge every month in the 
equipment record. The monthly depreciation charge is 
computed and entered on the subsidiary record in addition to 
the annual charge. Each month an adjusting journal entry 
is prepared, using as the amount the total of the monthly 
depreciation charges on all units as determined from the infor- 
mation shown in the work sheet (Form 69). The entry is 
as follows: 

General Journal 

(Dr.) (Or.) 





General 
Ledger 




Jan. 31, 19 


General 
Ledger 






$117 


50 




Depreciation on Machinery 
















Reserve for Depreciation on 
















Machinery 


$117 


50 












To charge the cost of 
















manufacturing with de- 
















preciation applicable to 
















January. 









In collecting monthly depreciation amounts for statement 
purposes and adjusting entries, a special work sheet is usu- 
ally employed. The work sheet, an illustration of which 
is shown below, collects the monthly depreciation amounts for 
all units of a separate group of fixed assets. A recapitulation 
of this work sheet at the end of the fiscal year is used to verify 
the annual depreciation charge recorded in the depreciation 
reserve column of the equipment record. The monthly total 
on the horizontal line is the amount for which the monthly 
adjusting journal entry is made. The total amount in each 



332 



COST FINDING FOR ENGINEERS 



vertical column should agree with the annual amount of depre- 
ciation chargeable on the specific unit as specified on the indi- 
vidual equipment ledger sheet. The total amount of depre- 
ciation appearing in the column headed, " total monthly 
charge/' at the end of the year, $1,420, should agree with the 
total credits made to the Reserve for Depreciation on Machin- 
ery account as a result of posting the monthly adjusting 
entries. 

FORM 69 
Work Sheet 



Monthly Depreciation Charges on Machinery Units 
















Total 


Date 


#M-1 


#M-2 


#M-3 


#M-4 


#M-5 




Monthly 
















Charge 


19 


, 




























Jan. 


$ 12 


50 


$ 50 


00 


$ 25 


00 


$ 30 


00 










$ 117 


50 


Feb. 


12 


50 


50 


00 


25 


00 


30 


00 










117 


50 


Mar. 


12 


50 


50 


00 


25 


00 


30 


00 










117 


50 


Apr. 


12 


50 


50 


00 


25 


00 


30 


00 










117 


50 


May 


12 


50 


50 


00 


25 


00 


30 


00 










117 


50 


June 


12 


50 


50 


00 


25 


00 


30 


00 










117 


50 


July 


12 


50 


55 


00 


25 


00 


30 


00 










122 


50 


Aug. 


12 


50 


55 


00 


25 


00 


30 


00 










122 


50 


Sept. 


12 


50 


55 


00 






30 


00 


$20 


00 






117 


5t) 


Oct. 


12 


50 


55 


00 






30 


00 


20 


00 






117 


50 


Nov. 


12 


50 


55 


00 






30 


00 


20 


00 






117 


50 


Dec. 


12 


50 


55 


00 






30 


00 


20 


00 






117 


50 




$150 


00 


$630 


00 


$200 


00 


$360 


00 


$80 


00 






$1,420 


00 



Questions 

1. Under what conditions is it necessary to have equipment controlling 
accounts? 

2. State some of the factors which make it imperative to have a sub- 
sidiary record for equipment. 

3. In what manner are equipment controls established? 

4. What are the different items of information which should be shown 
in an equipment ledger or record? 

5. Of what value is the information pertaining to repairs in the equip- 
ment subsidiary record? 

6. How are the equipment controlling accounts proved? / 

7. If the equipment controlling account balance does not agree with 
the subsidiary record, what steps must be taken to bring the two amounts 
into agreement? 

8. State how it is possible to make use of a Reserve for Depreciation 
controlling account. 



CHAPTER XXII 
THE HANDLING OF PAYROLLS 

1. The Importance of the Payroll. 

The preparation of the payroll involves the handling of 
many details. Each day a record of the time worked by each 
employee must be verified, analyzed, and compiled in summary 
form. The verification is for the purpose of preventing 
errors in payment to employees. The analyses serve as a 
basis for making the proper cost distributions for labor. The 
compilation of daily wage tickets forms the basis for building 
the final payroll covering a definite pay period. The prep- 
aration of the payroll, while an internal operation, is just as 
important as handling the detail in connection with customers' 
accounts, and the preparation and payment of vouchers. 
Through the payroll you are dealing directly with your workers 
on a most vital subject, namely, their daily bread, and payroll 
preparation, therefore, demands the utmost care. 

The importance of the payroll may be seen in the following 
statements, each of which is described in further detail. 

a. Necessitates accuracy, rapidity, and safety in getting 
wages to the worker. 

6. Constitutes a part of the internal check on the cash 
distributed to the employees. 

c. Provides a basis from which a distribution of labor costs 
may be made to the various expense accounts. 

A. Getting the Wages to the Worker. 

Keeping the employees satisfied is an important principle 
of sound management. Nothing makes an employee more 
dissatisfied than to have his check or pay envelope short 
of the amount due him. Every verification possible should be 
applied to the calculation of the amount due the employee. 
The verifications of the amount due each employee are ascer- 
tained from the time clock card, time slip, time keeper, payroll 
clerk, and disbursing officer. The part each plays leading to 

333 



334 COST FINDING FOR ENGINEERS 

the final payroll is described in detail in later sections of this 
chapter. 

Closely following the importance of accuracy is the need of 
getting the employee's pay to him as rapidly as possible. 
The rapidity with which the employees are paid depends in a 
terge measure upon the nature of the pay plan in the plant. 
If straight day work or an hour wage is the only basis for com- 
puting the payroll, then little time is required to figure the 
amount that is due each employee. The existence of piece work 
and bonus systems increases the amount of clerical labor 
required to complete the payroll. Payment of wages to plant 
employees should be made not more than two weeks after the 
end of the pay period. 

The third important principle of getting the wages to the 
worker is the factor of safety. Many concerns still adhere to 
the old practice of paying by cash, which has both advan- 
tages and disadvantages. A safer method of wage payment 
avails itself of the pay-check method which ikewise has its 
merits and drawbacks. 

Wage payment by cash presents two big problems, as 
follows: 

1. Analysis of the amount due each employee in order that 
the exact amount of currency and coins may be ordered from 
the bank so that the pay envelopes may be correctly filled. 
This is technically known as " taking off change/' and quite 
often requires a considerable amount of time and trouble. 

2. Safeguarding the cash transferred from the bank to the 
plant, and the payment to the employees. The cost of pro- 
tection purchased in the form of police, guards, armored 
automobiles, tear gas, and other ordnance is an expense to be 
compared with the cost of pay-check preparation. 

Wage payment by check involves the following problems: 

1. The cost of writing, signing, auditing, and reconciling 
the pay checks, which amounts to considerable work in the 
course of a year. 

2. Arrangements must be made in many cases with some 
bank for cashing the employees' checks. 

Many other arguments for and against both methods are 
to % be considered when a company is newly organizing or plans 
to change over from one method to another, 



THE HANDLING OF PAYROLLS 335 

B. The Importance of an Internal Check on the Payroll. 

There must be an adequate double check on the amount paid 
each employee to prevent the possibility of collusion between 
the employees and payroll clerks, whereby the company would 
be defrauded. The paymaster of the plant is always a trusted 
employee with a record of many years of service. As an extra 
safeguard he is usually heavily bonded. When this officer is 
not engaged in paying the employees, his duties usually consist 
of checking and verifying the amounts due individuals, in 
addition to making the payroll distribution. Too much 
emphasis cannot be laid on the importance of having the differ- 
ent steps involved in the preparation of the payroll in the 
hands of different persons. 

A rather adequate internal check on the amount paid to 
each workman may be affected by having in operation the 
following plan. 

1. Each workman is required to punch a time-clock card, 
showing the hour when entering and leaving the plant. Watch- 
men prevent workmen from punching more than one time card. 

2. The foreman of indirect labor is required to turn in time 
slips showing the nature of the operation and the number of 
hours worked by 'each employee of this classification. 

3. Each workman classed as a direct laborer is required to 
prepare either a production card or a time slip showing the 
number of hours worked on each job. 

4. A timekeeper is employed whose duty it is to make a 
trip through the plant at least twice a day to note in a time 
book the presence of each workman at his job in the plant. 

From the individual time-clock cards is calculated the total 
number of hours worked in each pay period. This should be 
the work of a clerk who has nothing else to do with the payroll 
preparation. At the end of each pay period a report should 
be made to the auditor showing the number of hours in the 
plant by each workman. The daily presence of each workman 
as shown on his time card is verified by the timekeeper's book. 
An additional verification on the number of hours worked by 
each employee is determined by checking the individual's 
time slip or wage ticket with the daily time-clock card in the 
auditor's office. Other clerks who have had nothing to do 
with the verification of time-clock cards and the time slips 



336 



COST FINDING FOR ENGINEERS 
POBM 70. TIME CLOCK CARD 1 



Form No. 1163 A .j 1? 
PAY ENDING -TlprU J 


19 


No 61 

NAME 

J. K. Hill 




MORNING 
IN 


NOON 

OUT 


NOON 

IN 


NIGHT 

OUT 


EXTRA 
IN 


EXTRA 

OUT 

Jl 




~ 644 


- 1202 T-H 1255 


IH 504 




9 




<N 6^8 


<N 1201 


<N 1257 


<N 502 




9 




co, 726 


co H59 


co 1246 


co 503 


w 600 


900 |H^ 




* 651 


<* 1200 


TH 1254 






-* 602 |io 




*> 700 


*o 1203 


*> 1259 


o 503 




9 


















I- 702 


t. 1204 


t- 1258 


*- 505 




m 




oo 801 


oo 1210 


co 101 


oo 430 




7M 




o> 650 


o H58 


o 1253 


504 




8M 




o 6 44 


2 1203 


g 1252 


2515 




9 




3 651 


2 1204 


2 1255 


2 503 


3 600 


3 801 |n 




2647 


2 1204 


2 1258 


2 459 


2602 


2 1000 1 12% 




2 728 


2 1130 








4 




2658 


2 1204 


2 100 


3503 




9 




2700 


2 1205 


2 1259 


2 506 




9 
















TOTAL TIME 127^4 


RATE 


.88 




TOTAL WAGES $112.42 



By courtesy of the International Business Machines Corporation, New York City. 

compute the amount due each employee. An effective check 
is thus provided on the amount due each worker. In some 
plants the treasurer's office is responsible for the actual cash 
payment after the payroll has been prepared, a representative 



THE HANDLING OF PAYROLLS 



337 



of the treasurer's office and the paymaster jointly paying the 
employees. 

It is the function of the shop employees to place on the time 
slips and wage tickets daily the number of hours worked a,nd 
the time devoted to each job and operation. It is the func- 
tion of the payroll clerks to write the occupation or operation 
rate on the time slips or wage tickets and make the extensions 
showing the amount earned. 

C. The Labor Distribution. 

Analyses of the wage tickets and time slips furnish the 
figures for making a distribution of labor costs. The labor 
distribution may be prepared daily or monthly. Labor cost 
distribution means the analysis of the amount of wages paid 
to the different departmental job and expense accounts of the 
plant. The number of wage distribution accounts is deter- 
mined by the nature of the product or products manufactured, 
the size of the plant, and the different needs of the manage- 

FOKM 71 



Employee's Name. 



Indirect Labor Time Slip 



John H. Mellor 



No.. 



77 



Department Labor Gang gection Date Jan - 3 ' 19, 



Operation 



Hours 



Rate 



Amount 



Loading scrap . 



$0.50 



60 



Chas. Winks 



Foreman 



338 



COST FINDING FOR ENGINEERS 





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Clock Record 


































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Employee 
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THE HANDLING OF PAYROLLS 339 

ment. The labor distribution slip, as illustrated jn Form 75, 
provides for 33 different wage distribution accounts. 

As the workmen's time slips or wage tickets are received in 
the office each day, the amount earned is calculated and entered 
on the payroll sheet, after the verification previously men- 
tioned has been completed. Time slips are usually prepared 
by the indirect laborer foremen, while the term " wage tickets " 
generally refers to a record of work done by the direct laborers. 

The daily wage tickets, as filled in by the direct laborer, show 
the nature of the work which he has done. The name or num- 
ber of the wage account affected is then placed on the wage 
ticket by a clerk. All of the wage tickets are sorted daily 
in accordance with the name and number of the wage account 
affected. The total daily amount of wages applicable to each 
wage account is thereby computed. At the end of each pay 
period or at the end of each month, a journal entry is made 
whereby each wage expense account is charged for the amount 
of wages earned within the period. In event expense con- 
trolling accounts are used in conjunction with an operating 
ledger, the distribution of labor is made from the payroll 
voucher as described in Sec. 7 of this chapter. This eliminates 
a general journal entry for the labor distribution. 

2. Other Points Involved in Payroll Preparation. 

The steps involved in the preparation of the payroll have 
been described in some detail. Other points pertaining to the 
payroll which need description in order to understand the 
accounting for it are as follows. 

a. Calculating wages due under various wage payment 
plans. 

b. Frequency of payment. 

c. Deductions from employees' wages (assignments). 

d. Payment to employees. 

Each of these features is described in the following sections: 

3. Wage Payment Plans. 

Different plans of determining wages are in effect in different 
manufacturing establishments. Some small concerns, pro- 
ducing a simple product, may have a straight day wage, 
paid to all employees. 

Other similar businesses may pay different rates per hour in 
accordance with the nature of the occupation. Plants pro- 



340 COST FINDING FOR ENGINEERS 

ducing a varied line of commodities, where assembly is nec- 
essary, may pay their direct laborers on the piece-work plan, 
and in addition pay hourly wages to the indirect laborers. 
Direct laborers may be paid piece-work rates on production, 
and hourly rates while production is at standstill due to 
machine breakdown, lack of orders, or material shortage. 
These off-standard situations are problems that must be 
carefully accounted for, if a cost system is to be effective. 
Many modern plants have in operation some type of bonus 
for exceeding standard production. In a steel or glass plant, 
wages may be computed on a daily tonnage basis, with addi- 
tional bonus money at the end of the month or quarter for 
exceeding the standard tonnage production. Indirect laborers 
may also work on the incentive plan, provided their work is 
readily measurable. Where the work is difficult of accurate 
measurement, they often are paid a bonus based upon the 
average earned by the direct labor group. Plant foremen 
and superintendents are usually paid on a monthly basis. 
The above descriptive wage payment plans have been enu- 
merated to give an idea as to the work which is required to com- 
pute the daily pay due each workman. Each wage ticket of 
each workman must provide for the amounts earned under 
the different plans in operation within a given plant, because 
the individual wage tickets form the basis for the payroll 
preparation. 

4. Frequency of Wage Payment 

The customary pay period is either twice a month or every 
two weeks. This means that payrolls must be prepared either 
24 times a year on the first basis, or 26 times a year on 
the second basis. Administrative officers ; clerks, and salesmen 
are usually paid once a month, and a separate payroll is pre- 
pared for them. 

There is an advantage, from an accounting viewpoint, in 
paying semimonthly rather than every two weeks. Where 
there are but two pay periods in the month, namely, from the 
first to the fifteenth, inclusive, and from the sixteenth to 
the thirtieth or thirty-first, inclusive, the entries for the 
accrued payroll are taken from the completed payroll at the 
end of the month. This is a quite important factor because 
it eliminates the necessity for a separate accrual computation 



THE HANDLING OF PAYROLLS 341 

for several odd days at the end of the month under the two- 
week plan. 

Where the pay period is semimonthly, closing with the 
fifteenth and the end of the month, the actual pay day is 
usually about five days thereafter or on the twentieth, and 
fifth of the following month. The intervening time permits 
preparation of the payroll. 

5. Payroll Assignments. 

Most business concerns have the problem of payroll assign- 
ments and make deductions from their employees 7 wages with 
the preparation of every payroll. These assignments are 
for various purposes. Some of the most common assignments 
are made for: 

1. Cash advances of wages made to employees. 

2. Company store purchases or payments authorized to 
be made to some creditor of the employee. 

3. Garnishment or other liens against the employee's wages. 

4. Contributory group insurance premiums. 

5. Capital stock purchase payments. 

6. Relief association dues. 

A separate column should be provided in the payroll sheet 
for each separate type of deduction. The total payroll is 
prepared showing the amount due each employee for the total 
time worked. Any deductions are subtracted from the figure 
representing the wages for services rendered by each employee, 
and the balance is the amount which the employee is paid. 

6. Payment to Employees. 

After the payroll sheet is completed at the end of each pay 
period, in event payment is made by cash, an identification 
slip is made out in duplicate for each workman. Each 
copy shows the name of the workman, his number, and 
the amount of wages due. The original copy goes to the work- 
man who presents it to the paymaster on pay day after he 
has affixed his signature thereto. In this manner the slips 
serve as a receipt for the money paid. An adding machine 
tape is run from the duplicates, the total of which repre- 
sents the amount to be drawn if payment is made in cash. 
If payment is made by check, the slips serve as a basis for 
writing the checks. 



342 COST FINDING FOR ENGINEERS 

The necessity, where payment is made by cash, for making 
an analysis of the currency and coin denominations needed 
to fill each employee's envelope has already been mentioned. 
For example, if the pay due an employee amounts to $57.93, 
it would require the following pieces of money: 

2 $20 bills $40.00 

1 $10 bill 10.00 

1 $ 5 bill 5.00 

2 $ 1 bills 2.00 

1 half dollar 0.50 

1 quarter . 25 

1 dime 0.10 

1 nickel 0.05 

3 pennies 0.03 

Total $57.93 

The amount due each employee on the payroll must be likewise 
analyzed. Upon completion of the task, the bank is requested 
to prepare the various denominations, the total of which equals 
the voucher check drawn for the entire payroll. When the 
check is exchanged for the payroll cash, the pay envelopes are 
filled and made ready for pay day. This making of change for 
each envelope must be carefully done or endless trouble is in 
store in finding where the erroneous filling of envelopes has 
taken place. 

7. Accounting for the Payroll. 

The chief details pertaining to the safeguarding and pre- 
paration of the payroll have been described in the preceding 
sections. It has been described how the time slips and direct 
labor wage tickets form the basis for the preparation of the 
payroll sheet, showing the amount due each employee. From 
these same forms, the distribution of labor costs is also 
obtained. 

As the wages for each employee are computed from the time 
cards each day, a record is made on both the payroll sheet and 
the labor distribution record. There are many forms of the 
payroll sheet and labor distribution record. Two of these, 
Forms 73 and 75, are suggestive of types that may be followed 
for specific installation. 



THE HANDLING OF PAYROLLS 



343 



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344 



COST FINDING FOR ENGINEERS 



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THE HANDLING OF PAYROLLS 



345 



FORM 75 

FRY EQUIPMENT Co. 
ROCHESTER, PA. 

DAILY 

LABOR DISTRIBUTION 
Date December 16, 19 



Amount 


Acct. 




$ 15|00 


311 


Mach. Dept. 


35 40| 


1 312 


Assem. " 


1860| 


| 313 


Tank 


10|10| 


314 


B. F. 


8|75| 


| 315 


L. G. 


*$ 87|85| 


1 


DIRECT LABOR 


1 


| 325 


Def. Mat. & Wk. 


1 


| 330 


Gen. Labor 




j 332 


Inspection 


1 


| 337 


Rep. to Eqpt. 


I 


1 


MACHINE 


1 


| 423 


Bonus 


$ 2 00 


| 425 


Def. Mat. & Wk. 


1 


430 


Gen. Labor 


1 


| 432 


Inspection 


1 


437 


Rep. to Eqpt. 


*$ 2 00| 


1 


ASSEMBLY 


1 


| 525 


Def. Mat. <fe Wk. 


1 


1 530 


Gen. Labor 


1 


| 532 


Inspection 


$ 2|50! 


| 537 


Rep. to Eqpt. 


*$ 2|50| 


1 


TANK 


1 


| 628 


Exper. 




| 630 


Gen. Labor 


1 


1 


BATTERY FILLER 


1 


1 


LIQUID GAUGE 


1 


182 


Service 


1 


| 204 


Shipping 


1 


I 277 


Misc. Deduc. 


$ 5 00| 


| 821 


Truck Driver 


1 


| 825 


Reclaim 


1 


| 827 


Eng. Exp. 


4|50| 


| 830 


Police 


2'40| 


| 830 


Storeroom 


1 


| 830 


Laborers 


1 1 


| 830 


Maintenance 


6|00| 


| 832 


Inspection 


! 


| 840 


Welfare 


1 


| 845 


Power House 


1 1 


1 




1 1 


1 




1 1 


1 




*$ 17|90| 


1 


MISCELLANEOUS 


* ioloo| 


1 


INDIRECT LABOR 


*120|25) 


1 


TOTAL 



346 COST FINDING FOR ENGINEERS 

Note that the total pay for Dec. 16 amounts to $120.25. 
This figure agrees with the labor distribution slip for the same 
date as shown in Form 73. The daily totals on both the payroll 
and the labor distribution forms must always agree, since 
they are prepared from the same source the wage tickets. 

When the payroll sheet is complete at the end of the pay 
period, a voucher is drawn for the net amount to meet the 
payroll, $1,760.25. For the illustration on page 343 the entry 
in the voucher register would be as shown on page 344. 

The daily labor distribution summaries are recapitulated 
at the end of each pay period in order to show the amount to 
be charged to each wage account. The final figures for the 
labor distribution at the end of the pay period are attached to 
the voucher, from which they are recorded in the voucher 
distribution summary sheet. In this manner each wage 
account is charged with the proper amount as it ultimately 
appears in the operating ledger. 

Questions 

1. What are the problems involved in getting wages to the worker? 

2. Describe a system of internal check which should be in operation 
in connection with a payroll. 

3. What is the function of the following forms: 
a. Time slip? 

6. Wage ticket? 

c. Time-clock card? 

d. Payroll sheet? 

e. Labor distribution? 

4. What is the problem involved in connection with fixing the pay 
periods? 

5. Name several different ways in which wages are determined. 

6. What are some of the reasons for making a deduction from em- 
ployees' wages? 

7. What is meant by "taking off change," and what are some of the 
problems involved? 

8. Under what classification of accounts would you place the payroll 
account? 



CHAPTER XXIII 
CODE CLASSIFICATIONS 

1. The Purpose of Codes for Accounts. 

To obtain an orderly arrangement and proper organization 
of the accounts of an enterprise, a classification code must be 
established. 

This code of accounts means the use of symbolic numbers 
and letters to indicate both the different kinds of accounts, 
and the different departments and operations of the concern. 
The code also indicates the plan of organization of the concern 
with the many relationships that exist between departments 
and operations; it covers as well the different classifications 
of accounts which have been analyzed in Chap. II. 

As an illustration, take a charge number for one account from 
the code of accounts of a large steel concern and see how much 
information is packed into this code number. An amount of 
$84.50 is charged to 51. 105. Analyzed, this shows : First, that 
the charge goes to a blast furnace because the whole number 50 
always indicates blast furnaces. Second, the number further 
localizes the charge to blast furnace No. 1, as the unit 
figure indicates which specific blast furnace is meant. Third, 
you know at a glance that it is a wages item as all items 
under 0.1 (first decimal place) are wage items. Fourth, you 
know that it is wages of ash wheelers, as the second and third 
decimal places are used for the different kinds of labor and 
it so happens that 05 is the code number for ash wheelers. 

Thus, in one number you see at a glance an ash wheeling 
wages charge made to blast furnace No 1. Should this same 
kind of work be performed at No. 8 open hearth, instead of 
No. 1 blast furnace the charge would read 68.105 as 60. is 
open-hearth department and 8 the specific open hearth. 

Let us list the more important advantages that are 
inherent in a code classification. 

1. It indicates all the accounts according to a functional 
classification and also carries a symbol for each department. 

347 



348 COST FINDING FOR ENGINEERS 

2. A proper code is elastic and can be expanded or con- 
tracted with ease; thus it allows for any changes in size and 
nature of the plant. 

3. A code is a great time saver because it eases the handling 
of accounting data and the manifold classifications such 
data necessitate. 

4. It establishes a scientific and simple system for filing. 

5. It is a necessary part of electric tabulation wherein 
accounting data are punched into a tabulating card. (Electric 
tabulation of costs is covered in cost accounting proper.) 

6. It makes the learning of both the organization plan 
of the concern and its accounting system quite easy, in that it 
presents a logical relationship of all departments and all 
accounts. 

7. Many concerns are now members of a trade associa- 
tion or the like. Uniform accounts of all concerns in the 
association are now established by the more important trade 
groups. A like code of accounts is the method of getting 
uniformity. 

8. When the matter of budget making is taken up in cost 
accounting, it will be seen that both budget estimates and 
budget allowances are set up under the same code classifica- 
tion that will record the expenditures, when they are made. 
This feature of the code makes budget operations both clear 
and easy. 

9. A code furnishes a simple and understandable means 
for routing and scheduling materials, men, etc., through- 
out the shop, and also furnishes the means of controlling 
materials in stock as well as in process. 

10. A code of accounts greatly assists in the develop- 
njient of standardization because the workings of a good code 
point out a situation found in many plants of having many 
similar articles used for exactly similar purposes. Thus, as 
we work to simplify the code, we reduce the number of items, 
which means definite steps toward standardization. 

j 
2. Types of Codes. 

In the developing of a code it is important to adhere to 
several important principles to assure success. The following 
points are pertinent: 

1. The code must be kept simple, so that it can be readily 
understood. A complex code is always a confusing one. 



CODE CLASSIFICATIONS 



349 



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350 



COST FINDING FOR ENGINEERS 



2. It must be one that is easy to remember. A quickly 
memorized code means less errors in its usage. 

3. It must be elastic so that expansion is easy. 

4. It must coincide with the working divisions of a plant, 
thus assuring a close contact between accounts and the shop. 

With these four fundamental points kept in mind, let us 
scan a few of the different types of codes. 

' 3. The Mnemonic System. 

This system of coding uses letters in the account numbering 
that associate with the memory the name of the account: A 
for Assets; L for Liabilities; C for Capital, etc. 

4. Numerical System Whole Numbers Only. 

This system makes use of whole numbers only in the scheme 
of numbering the accounts. The general plan is to have a 
key number for each of the major groups of accounts. A 
subkey number is adopted for each of the subdivisions under 
each major group. And under each subdivision the individual 
accounts are numbered. 

The plan is illustrated as follows: 

CHART 10. CODE SYSTEM WITH WHOLE NUMBERS ONLY 



Major groups 


Key 
number 


Subdivision 


Key 
number 


Account number 


Assets 


1 


Current 


10 


Cash 100 






Fixed 


12 


Laud 120 






Deferred Charges 


14 


Prepaid Insurance 140 


Liabilities . . . 


2 


Current 


20 


Notes Payable 200 






Long Terra 


22 


Mortgage Payable 220 






Deferred Credits 


24 


Prepaid Rentals 240 


Ownership 


3 


Capital or Capital Stock 


30 


Common Capital Stock 300 






Surplus 


32 


Earned Surplus 320 






Surplus Reserves 


34 


Reserve for Betterments 340 


Income or Revenue. . . 


4 


Operating Income 


40 


Sales 400 






Incidental Income 


42 


Commission Earned 420 


Expense . . 


5 


Manufacturing 


50 to 53 


Raw Material Purchases 500 






Marketing 


54 and 55 


Advertising 540 






General and Administrative 


56 and 57 


Officers' Salaries 560 






Incidental 


58 


Interest and Discount Paid 580 


Valuation Reserves. . . 


6 


Pertaining to Current Assets 


60 


Reserve for Doubtful 










Accounts 600 






Pertaining to Fixed Assets 


62 


Reserve for Depreciation 










on Buildings 620 



CODE CLASSIFICATIONS 



351 



While the above system provides for expansion, it is not 
infinite in its scope. It is a very simple system to master 
through becoming familiar with the key and subkey numbers. 
For example, the number 22 amplifies the fact that the liability 
account is a long-term liability. The number 220 further 
defines and limits an account under the long term liability 
group, the name of which must become associated with that 
particular number. 

6. Numerical System Fractional Numbers. 

A system which provides for the use of decimal numbers 
in the coding system may be expanded indefinitely. Whole 
numbers are for signifying the major groups and subdivisions, 
and decimals are used to designate the individual accounts. 

This plan works in accordance with the following illustration : 

CHART 11. FRACTIONAL NUMBER CODE SYSTEM 



Major groups 


Key 

number 


Subdivisions 


Key 
number 


Account number 


Assets .... 


1 


Current 


10 


Cash 10 . 1 










Petty Cash 10.2 










Notes Receivable 10 . 3 






Fixed 


100 


Land 100.1 










Buildings 100.2 






Deferred Charges 


1000 


Prepaid Insurance 1000 . 1 


Liabilities 


2 


Current 


20 


Notes Payable 20.1 






Fixed 


200 


Mortgage Payable 200 . 1 






Deferred Credits 


2000 


Prepaid Rentals 










Received 2000.1 


Ownership 


3 


Capital or Capital Stock 


30 


Common Capital Stock 30 . 1 






Surplus 


300 


Earned Surplus 300.1 






Surplus Reserves 


3000 


Reserve for Better- 










ments 3000.1 


Income or Revenue. . . 


4 


Operating 


40 


Sales 40.1 






Incidental 


400 


Commissions Earned 400 . 1 


Expense 


5 


Manufacturing 


5 


Raw Material Pur- 










chases 5 . 1 






Marketing 


50 


Advertising 50 . 1 






General and Administrative 


500 


Officers* Salaries 500.1 






Incidental 


5000 


Interest and Discount 










Paid 5000.1 


Valuation Reserves... 


6 


Pertaining to Current Assets 


60 


Reserve for Doubtful 










Account 60 1 






Pertaining to Fixed Assets 


600 


Reserve for Buildings 600 1 



From a perusal of the above plan it may be seen that this 
system permits of indefinite extension, since the individual 
accounts are represented by decimals. For example, if there 



352 



COST FINDING FOR ENGINEERS 



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CODE CLASSIFICATIONS 



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354 



COST FINDING FOR ENGINEERS 




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81 



Key Numbe 



Cost Elem 




CODE CLASSIFICATIONS 355 

were 275 manufacturing expense accounts, they could be 
designated by the numbers 5.1, 5.2, etc., to 5.275. This 
system of coding the accounts may be applied to a very large 
account classification with each code number remaining 
relatively small in the number of figures used. 

No provision was made in this system for adapting the code 
to a group of expense controlling accounts. It would be possi- 
ble to do so by designating a block of decimals to a particular 
control group. For example, a stores controlling account 
could be designated by the numbers .1000 to .1999. For an 
overhead controlling account the decimal numbers .2000 to 
.2999 could be used. This scheme is not as feasible as a 
code system designed especially for application to controlling 
accounts. 

6. A Code System for Controlling Accounts. 

Many manufacturing establishments as well as contracting 
concerns, which have cost systems in operation, departmen- 
talize their business. When this is expedient, the accounting 
system must follow the organization plan. The accounts 
required to record the costs within the departments may be 
readily associated together. This association of code with 
departmental division is of great importance. Through this 
tie-in, the code makes it possible to set up fixed controls under 
specific plant officials, be it a minor executive, such as a fore- 
man, or major executive, such as a general manager of a large 
division. 

In a large manufacturing plant there exist what is known 
as Service Departments. These are departments where no 
production takes place, but indirect departments whose duty 
is to furnish special types of service involved in production. 
Some illustrations of indirect departments are the stores, per- 
sonnel, clerical, power, and research departments. The expense 
accounts for these departments are usually in a subsidiary 
ledger controlled by a general ledger account. Again, this 
type of account may be coded so that the account number may 
be identified readily with the department and quite often 
with the individual at the head of the department. 

Controlling accounts for raw materials, work in process, 
labor, overhead expenses, or any other type of expense may be 
given an identification code number. 



356 COST FINDING FOR ENGINEERS 

An illustration of a system of accounts involving departments 
both productive and service, inventories and expenses, is 
given in Chart 12. The coding system is designed to differ- 
entiate actual operating costs from departmental processes. 
At the same time, cost elements charged with work in process 
may be followed through various departments by a combina- 
tion of the departments and expense codes. This system of 
coding is very flexible, yet carries a clear and simple identifica- 
tion number from the controlling account down to the many 
detailed subsidiary accounts. 

Practical application of this system of coding is given in a 
plant manufacturing gears and pinions shown on pages 352, 
353 and 354. 

Questions 

1. What is meant by a code classification? 

2. What are the characteristics of a successful code system? 

3. Enumerate the advantages of a code classification. 

4. What is the mnemonic code system? 

5. What advantages has a fractional numerical code system over a 
numerical system with whole numbers only? 

6. Describe a code system designed for application to a plant having 
numerous factory control accounts, several service departments and 
numerous production departments. 



PART IV 
REVENUE ACCOUNTS 

CHAPTER XXIV 

THE PRINCIPLES AND OPERATION OF REVENUE 

ACCOUNTS 

1. Revenue Accounts A Simple Form of Cost System. 

Several chapters have been devoted to expense and cost 
controls pertaining to manufacturing concerns. When one 
speaks of accounting for a manufacturing industry, cost 
accounting is generally brought to mind. Many small manu- 
facturing plants, however, have no complete cost system in 
operation. In the place of a real cost system, production costs 
as well as marketing and administrative costs are ascertained 
through the use of revenue accounts. 

Revenue accounts are accounts which bear the names of 
special departments or divisions of the business for the purpose 
of ascertaining the costs and profits of the particular depart- 
ment or division. The use of revenue accounts is by no means 
the equivalent of a cost system. Cost determinations by use of 
revenue accounts are inadequate except for those plants which 
manufacture but one or a very few commodities. Even in a 
plant whose productive scope is narrowed to one commodity, 
quite often cost determinations by revenue accounts are 
inadequate. Finding the cost of every operation performed in 
the manufacture of each different product is one of the main 
functions of cost accounting. Costing each operation is not 
attempted where revenue accounts are used, which is one of the 
reasons why they are inadequate. 

Revenue accounts, however, are a distinct stepping stone 
toward a real cost system. The same elements of cost are 
involved in the production of commodities whether or not a 
cost system exists. The presentation of revenue accounts in 
this text is the transitional step to cost accounting proper. 

357 



358 COST FINDING FOR ENGINEERS 

2. The Nature of Revenue Accounts. 

Revenue accounts are departmental profit and loss accounts. 
The revenue accounts used most frequently in a manufactur- 
ing concern are: 

1. The Manufacturing account. 

2. The Marketing account. 

3. The Administration account. 

4. The Profit and Loss account. 

These accounts are used as summary accounts, at the end of 
the fiscal period into which the operating accounts are closed. 
The many detailed expense and income accounts are trans- 
ferred from the general ledger and the expense ledgers to the 
several revenue accounts. By this procedure, the operating 
figures for each division or department may be known. The 
single profit and loss account described in Chap. XI, did not 
permit of such analysis. To obtain an adequate measure of 
control over plant operations in the absence of a cost system, 
it is necessary to have a knowledge of: 

1. The volume of business carried on in each department. 

2. The expenses incurred in each department. 

3. The income applicable to each department. 

4. The general expense applicable to all departments. 

5. The final result of operations for the entire plant. 
Revenue accounts provide for these summaries. 

The revenue accounts for Manufacturing, Marketing, 
Administration and Ffofit and Loss listed at the top of this 
page are by no means the only such accounts in use. There 
may be a revenue account created for any special group of 
expenses or for any special activity, for which there is manage- 
rial need. Other examples of revenue accounts are as follows. 

In an accounting system for a coal mine: 

1. Mining account. 

2. Company Store account. 

3. Real Estate (company houses) account. 

4. Bus Service account. 

In an accounting system for a department store: 

1. A separate revenue account for each department. 
In an accounting system for a building contracting concern: 

1. Road Construction account. 

2. Automobile Maintenance account. 



THE PRINCIPLES OF REVENUE ACCOUNTS 



359 



3. Boiler House account. 

4. Derrick, Dock, and Bin Maintenance account. 

5. Cement Block Manufacture account. 

6. Cafeteria account. 

7. Machine Shop account. 

In an accounting system for a bakery: 

1. Bakery account. 

2. Cafeteria account. 

3. The Operation of Revenue Accounts. 

-* 

The procedure for the use of revenue accounts in a manu- 
facturing concern follows. 

The various expense and income items are recorded in their 
specific accounts in the general or expense ledgers from day to 
day. After a trial balance is prepared at the end of the fiscal 
period and the final adjusting journal entries have been posted, 
these accounts are ready to be closed out through the revenue 
accounts. The most important problem at this time is to 
make the distribution of the individual account balances to the 
proper revenue account.' There is no balance in the revenue 
accounts prior to the time when the individual operating 
account balances are transferred. 

The nature of some of the more common accounts the 
balances of which are transferred to the different revenue 
accounts are as follows: 

FORM 76 
Manufacturing 



Inventory Raw Materials (at beginning 
of period) 

Inventory Work in Process 

Purchases Raw Material 

Freight and Cartage in on Raw Materials 

Direct Labor 

Indirect Labor 

Heat, Light, and Power 

Factory Supplies 

Insurance on Buildings and Machinery 

Compensation Insurance 

Repairs to Machinery and Tools 

Repairs to Buildings 

Depreciation on Machinery, Tools, 
Equipment and Buildings 

Taxes 

Rent (if buildings are not owned) 

Miscellaneous Factory Expense 
<z. Containers 
6. Royalties 



Inventory Raw Material (at the close 

of period) 

Inventory Work in Process 
Purchases Returned and Allowances 
Purchase Discount on Raw Material 
Balance representing the cost of 
goods produced is transferred to the 
Marketing account 



360 



COST FINDING FOR ENGINEERS 



FORM 77 
Marketing 



d. 



Balance transferred from Manufac- 
turing account 

Inventory Finished Goods (at beginning 
of period) 

Finished Goods Purchased 

Sales Returned and Allowances 

Sales Discounts 

Shipping Supplies and Expense 

Salesmen's Salaries 

Salesmen's Expenses 

Advertising 

Freight and Cartage Out 

Insurance on Delivery and Sales Equip- 
ment 

Depreciation on Delivery and Sales 
Equipment 

Repairs to Delivery and Sales Equip- 
ment 

Rent for Storage of Finished Goods (if 
buildings are not owned) 

Warehouse Expense: 

Balance representing the net profit on 
the sale of goods before deducting 
administrative expenses is trans- 
ferred to the General Adminis- 
tration account 



Sales (Total) 

Inventory Finished Goods (at close of 
period) 



FORM 78 
General Administration 



Officers' Salary 

Office Salaries 
/. Officers' Bonus 

Stationery and Office Supplies 

Telephone and Telegraph 

Insurance on Office Equipment 

Depreciation on Office Equipment 

Postage 

Legal and Professional Expenses 

Dues and Subscriptions 

Balance representing the net profit 
from the operation of the business is 
transferred to the Profit and Loss 
account 



Balance transferred from Marketing 
account 



FORM 79 
Profit and Loss 



Interest and Discount Expense 
Partners' and Officers' Bonus 
Donations 

g. Doubtful Accounts 
h. Interest on Mortgage: 

A credit balance represents a final net 
profit which is transferred to Capital 
or Surplus accounts 



Balance transferred from General 
Administration Expense account 

Miscellaneous Sales 

Rental Income 

Royalty Income 

Interest and Discount Earned 

Bad Debts Collected 

Commissions Earned 

Dividends Received: 
A debit balance represents a final 
net loss which is transferred to 
Capital or Surplus accounts 



THE PRINCIPLES OF REVENUE ACCOUNTS 361 

Any account pertaining to the cost of manufacturing should 
be closed through the Manufacturing account. All accounts 
representing the income from sales, the cost of sales, and 
expense incurred in making the sales should be closed through 
the Marketing Expense account. All expense accounts 
recording the cost involved in carrying out the administrative 
policies from the executive heads of the business should be closed 
through the Administration account. The incidental expense 
and income,. reflecting non-operating costs and revenue, should 
be closed directly to the Profit and Loss account. 

4. Prorating Expenses. 

Frequently one operating account will record the total 
expense which may be applicable to two or more departments. 
If such is the case, it is necessary at the time of closing the 
operating accounts to prorate the total expense among the 
several departments or revenue accounts in some arbitrary 
manner. An illustration may be made with the Telephone 
and Telegraph account. Ordinarily this type of expense is 
shown in an account under the name of General Administra- 
tion Expense. If this expense is considered to be applicable 
to the manufacturing, marketing, and general administrative 
divisions at the time of closing, the amount would be divided 
in some arbitrary manner to these respective divisions. The 
manner in which such items of expense are prorated must be 
determined in accordance with the nature of the expense and 
the existing conditions within the plant. For example, tax 
expense should be divided in accordance with the amount 
applicable to real and personal property. Taxes on real 
property would be applicable to land and building values. 
The amount of this particular tax might be allocated to the 
manufacturing, marketing, and administration divisions in 
accordance with the floor area occupied by the respective 
departments. 

Power consumption may be allocated by meter readings; 
heat by cubic foot space ; compensation insurance in accordance 
with the departmental payroll; and fire insurance on equipment 
and materials on the basis of the asset valuations. 

5. Distribution of Expense Items. 

Where operating accounts are closed through revenue 
accounts, controversy arises in connection with the distribu- 



362 COST FINDING FOR ENGINEERS 

tion of some items. For example, the accounts, Containers, 
Royalties, etc., appearing in the Revenue accounts shown 
on pages 359 and 360 illustrate some of the controversial 
cases. 

a. Containers may be either a manufacturing or a market- 
ing expense or an asset, depending upon their nature. When 
the nature of the commodities produced requires a package, 
box, keg, carton, or other container to transfer it to the sales 
department or warehouse, the cost of the container is ordinarily 
considered a manufacturing expense. If the commodity 
requires additional packing to prepare it for shipment, the 
cost of such containers should be considered a marketing 
expense. Some types of containers are considered as assets 
and known as "floating equipment/' as described in Chap. 
XIV. 

6. Royalties may be considered a manufacturing or market- 
ing expense, depending upon whether the royalty charge is 
based upon units produced or units sold. 

c. Purchase Discount, as a credit, is a debatable item in 
regard to the revenue account through which it should be 
closed. Some accountants maintain that it should be con- 
sidered only as a deduction from raw material purchase cost, 
hence a credit to manufacturing cost. Others hold that if the 
cash discount offered is above 2 per cent it is comparable to 
a trade discount and should be deducted from the purchase 
price. This is the more common practice. Other accountants 
maintain that the saving of cash discounts is determined 
only by the financial condition of the business being such 
that discounts can be readily taken; that it is a manage- 
ment problem; that it is incidental to the major operations 
of the business. Therefore, purchase discount represents 
an incidental income to be credited to Profit and Loss account. 
To argue the point with its many ramifications is without 
the scope and purpose of this text. In actual practice, 
purchase discount is closed through either the Profit and Loss 
or the Manufacturing account. A fundamental accounting 
principle is involved in this controversy, in regard to the unit 
cost of production, closing finished goods inventory valuation, 
and the accuracy of final net profit. These principles are 
described in the following Chapter under section 5. 



THE PRINCIPLES OF REVENUE ACCOUNTS 363 

d. Finished Goods Purchased may be shown in a separate 
trading revenue account if the purchase of finished product 
is a frequent practice. The item may be closed through the 
Distribution revenue account if relatively few units of a 
finished product are purchased. The purchase of finished 
goods is sometimes imperative if sales orders are to be filled 
to avoid cancellation and when the production department is 
behind schedule. 

e. Sales Discount brings up the same principle as purchase 
discount as to its proper location in the revenue accounts. 
It is argued that sales discount should be debited to the Mar- 
keting account, because it represents a deduction from the 
operating income, sales. The proponents of this policy main- 
tain that selling prices are boosted when goods are sold on 
credit terms, because of the risk involved; therefore, any 
discount allowed should be deducted from sales in order to 
reflect actual operating income. This contention seems to 
give way to a more logical argument. The advocates of 
treating sales discount as an incidental expense chargeable to 
profit and loss base their point of view upon the fact that 
managerial policy is behind the offering of the sales discount; 
that cash discount is offered as an incentive for prompt 
payment. If this viewpoint is taken, the discount should 
be shown as an incidental expense item by closing through 
the Profit and Loss account. 

/. Officers' Bonus is sometimes considered an operating 
expense. Partnership agreements may provide for a bonus in 
lieu of salary to certain partners, the bonus being based upon 
output, sales volume, or other goals set. In such cases, the 
bonus might be closed through Manufacturing, Marketing, or 
Administration revenue accounts. If the bonus is voted to the 
partner or officer of a corporation, it is usually considered as 
an incidental expense item to be closed through Profit and Loss 
revenue account. 

g. Doubtful Accounts as an estimated charge are sometimes 
considered as a selling expense and closed through the Mar- 
keting revenue account. The argument maintained for this 
procedure is that such expense arises from sales made, hence 
it should be treated as a selling expense. This argument 
gives way to a more convincing one. It is that the adminis- 
strative policy determines whether goods are to be sold on a 



364 COST FINDING FOR ENGINEERS 

cash or credit basis. If goods are sold on a credit basis 
and customers accounts cannot be collected, it constitutes 
purely a problem of management. Such a loss should be 
charged to the Profit and Loss account, therefore, as it is an 
incidental or non-operating expense. 

h. Interest on Mortgage is purely a financial item which 
should be closed through the Profit and Loss revenue account. 
Sometimes the argument is maintained that the loan for which 
the mortgage was given is used to finance the purchase of 
plant equipment or to furnish working capital; therefore, the 
cost of using the borrowed money is a manufacturing expense. 
Much has been written on this subject, and " interest as a 
cost" is fundamentally a cost accounting problem. The 
result of considering interest as a manufacturing expense is, 
however, considered in the next chapter. 

6. The Work Sheet in Connection with Revenue Accounts. 

Where revenue accounts are used in closing the ledger, the 
work sheet necessarily must be expanded. Instead of a 
single profit and loss column in the work sheet, as described 
in Chap. VI, a separate debit and credit column is used for 
each revenue account. In other details the work sheet is the 
same. Where monthly financial statements are prepared, the 
revenue or departmental divisions are shown in the work sheet 
but no postings are made to the revenue accounts in the ledger. 
Monthly adjusting entries are made only to the specific 
expense and income accounts. 

An illustration of a 14 column work sheet is shown opposite. 

7. Adjusting and Closing Entries in Connection with Revenue 

Accounts. 

Where operating accounts are closed through revenue 
accounts at the end of the fiscal period, all adjusting entries 
applicable to the income and expense accounts must be made 
prior to the closing of the revenue accounts. If monthly 
income, profit and loss statements are prepared, the adjusting 
entries are posted to the operating accounts monthly. But 
closing entries are prepared and posted only at the close of the 
fiscal period, usually once a year. This means that the 
revenue accounts in the ledger are used only at the end of 
the fiscal period. 



THE PRINCIPLES OF REVENUE ACCOUNTS 



365 



The adjusting and closing entries shown below are prepared 
from the work sheet illustrated in the preceding section. 

General Journal or Journal Vouchers 



19 
















Dec. 


31 


Adjusting Entries 
















a. Inventory, Raw Materials 




$17,039 


61 










6. Inventory, Work in Process 




1,711 


83 










Manufacturing 








$18,751 


44 






To set up inventory values at the close 
















of the year and to adjust production 
















cost. 
















c. Inventory, Finished Goods 




15,977 


94 










Distribution 








15,977 


94 






To set up inventory value at the close 
















of the year and to adjust cost of sales. 
















d. Insurance 




1,496 


25 










Prepaid Insurance 








1,496 


25 






To charge expense with the amount of 
















insurance applicable to the year. 
















e. Depreciation on Buildings 




977 


97 










Reserve for Depreciation on Buildings 








977 


97 






To charge off depreciation applicable 
















to the year. 
















/. Depreciation on Machinery 




2,465 


57 










Reserve for Depreciation on Machinery 








2,465 


57 






To charge off depreciation applicable 
















to the year, 
















g. Depreciation on Delivery Equipment 
Reserve > for Depreciation on Delivery 




469 


93 










Equipment 








469 


93 






To charge off depreciation applicable 
















to the year, 
















h. Depreciation on Furniture and Fixtures 




145 


75 










Reserve for Depreciation on Furniture 
















and Fixtures 








145 


75 






To charge off depreciation applicable 
















to the year. 
















t. Direct Labor 




562 


16 










Indirect Labor 




76 


40 










Salesmen's Salaries and Commissions 




416 


90 










Officers' Salaries 




125 


00 










Office Salaries 




37 


50 










Payroll Accrued 








1,217 


96 






To set up liability for the wages and 
















salaries owed at Dec. 31, 19 . 
















j. Doubtful Accounts 




847 


51 










Reserve for Doubtful Accounts 








847 


51 






To arrange expense for the year ended 
















Deo. 31, 19 with estimated losses 
















from customers accounts, 
















k. Commissions Receivable 




48 


50 










Commissions Earned 








48 


50 






To record the amount of commissions 
















earned but not received at Dec. 31, 
















19. 
















I. Dividends 




4,800 


00 










Dividends Payable 








4,800 


00 






To record the liability for payment of 
















dividends. 
















m. Earned Surplus 




4,800 


00 










Dividends 








4,800 


00 






To charge surplus with dividends 
















declared. 













366 



COST FINDING FOR ENGINEERS 







Closing Entries 
















Manufacturing 




$138,041 


98 










Inventory, Raw Materials 








$ 26,782 


44 






Inventory, Work in Process 








1,463 


63 






Purchases, Raw Materials 








63,010 


55 






Direct Labor 








31,233 


43 






Indirect Labor 








3,2*3 


32 






Heat, Light and Power 








2,709 


10 






Miscellaneous Factory Expense 








4,6^5 


65 






Compensation Insurance 








482 


10 






Telephone and Telegraph 








45 


71 






Insurance 








1,197 


00 






Depreciation on Buildings 








733 


48 






Depreciation on Machinery 








2,465 


57 






To close the expenses of production to 
















Manufacturing. 
















Purchases Returned and Allowances 




3,469 


11 










Manufacturing 








3,469 


11 






To close to Manufacturing, 
















Marketing 




115,821 


43 










Manufacturing 








115,821 


43 






To transfer the cost of production to 
















Marketing. 
















Marketing 




27,129 


71 










Inventory, Finished Goods 








10,417 


18 






Compensation Insurance 








70 


47 






Shipping Supplies and Expenee 








2,480 


12 






Salesmen's Salaries and Commissions 








10,837 


78 






Advertising 








787 


13 






Freight and Express Out 








1,368 


24 






Stationery and Office Supplies 








137 


65 






Telephone and Telegraph 








91 


42 






Postage 








154 


18 






Insurance 








149 


63 






Depreciation on Buildings 








122 


25 






Depreciation on Delivery Equipment 








469 


93 






Depreciation on Furniture and Fixtures 








43 


73 






To close the expenses applicable to Mar- 
















keting. 
















Sales 




139,167 


00 










Marketing 




* 




139,167 


00 






To close sales to Marketing. 
















Marketing 




12,193 


80 










Administration 








12,193 


80 






To transfer the net profit from Marketing 
















to Administration. 
















Administration 




8,695 


64 










Compensation Insurance 








26 


90 






Officers' Salaries 








6,000 


00 






Office Salaries 








1,559 


20 






Stationery and Office Supplies 








412 


97 






Telephone and Telegraph 








91 


42 






Postage 








231 


27 






Insurance 








149 


62 






Depreciation on Buildings 








122 


24 






Depreciation on Furniture and Fixtures 








102 


02 






To close the expenses applicable to 
















Administration. 
















Administration 




3,498 


16 










Profit and Loss 








3,498 


16 






To transfer the net profit from operations 
















to Profit and Loss. 
















Profit and Loss 




3,149 


29 










Interest on Mortgage Payable 








1,800 


00 






Sales Discount 








501 


78 






Doubtful Accounts 








847 


51 






To close incidental expenses applicable to 
















Profit and Loss. 
















Commissions Earned 




449 


40 










Purchase Discounts 




1,226 


13 










Profit and Loss 








[ 1,675 


53 






To close incidental income applicable to 
















Profit and Loss. 
















Profit and Loss 




2,024 


40 










Surplus 








2,024 


40 






To transfer the net profit to surplus. 













THE PRINCIPLES OF REVENUE ACCOUNTS <367 



8. Revenue Accounts as Operating Controls. 

Revenue accounts, although inadequate for collecting 
detailed costs, serve a useful purpose in that they provide a 
measure of control by: 

a. Showing an itemized comparison of fluctuations in 
expenses in the various departments. 

b. Serving as a guide to the factory administrative officers. 
c Collecting the actual expenses departmentally from which 

expense budgets may be prepared. 

d. Giving a departmental analysis of maintenance, repairs, 
and depreciation. 

9. Revenue Accounts versus a Complete Cost System. 

To illustrate the inadequacy of cost finding with the use of 
revenue accounts, a group of entries under a cost system are 
shown in comparison. These entries are for the operations 
occurring most frequently in a manufacturing plant. 
CHART 13. COMPARISON OF JOURNAL ENTRIES UNDER REVENUE 
ACCOUNTS AND A COST SYSTEM FOR THE MOHE COMMON OPERATIONS 



Transactions 


Entries under Revenue 
Account System 


Entries under a Cost System 



1. Raw Material 
a. Purchase 

6. Materials charged 
into production 

c. Defective materials 
returned to store- 
room 

d. Salvaged material 
returned to store- 
room 

2. Labor and Payroll 

a. Daily time charged 

to production 
6. Payment of payroll 

c. Labor distribution 
from the payroll 



3. Overhead Expense 

a. When indirect ex- 
penses are incurred 
6. Setting up indirect 
expenses to be 
charged into pro- 
duction 

c. Charging overhead 
into production 



Raw Material Purchases 
Accounts Payable 
No entry 

No entry 



No entry 



No entry 

Payroll 

Accounts Payable 
Difcect Labor 
Indirect Labor 
Sales Department Salaries 
Administrative 

Payroll 

Specific Factory Expenses 
Accounts Payable 
No entry 



No entry 



Stores 

Accounts Payable 
Work in Process Inventory 

Stores 
Stores 

Work in Process Inventory 

Stores 

Work in Process Inventory 



Work in Process Inventory 

Direct Labor 
Payroll 

Accounts Payable 
Direct Labor 
Indirect Labor 
Kales Department Salaries 
Administrative 

Payroll 

Specific Factory Expenses 

Accounts Payable 
Overhead Control 

Specific Factory Expenses 



Work in Process Inventory 
Overhead Control 



368 



COST FINDING FOR ENGINEERS 



CHART 13. COMPARISON OF JOURNAL ENTRIES UNDER REVENUE 
ACCOUNTS AND A COST SYSTEM FOR THE MORE COMMON OPERATIONS 

(Continued) 



Transactions 



Entries under Revemue 
Account System 



Entries under a Cost System 



Finished Goods Stage 

a. Completed units 
transferred from 
factory to sales de- 
partment 

b. When goods are sole 



5. Ascertaining Gross Pro- 

fit, and Net Profit 
a. To ascertain the cost 
of production 



6. To transfer cost of 
production to Mar- 
keting account 

c. To ascertain the 
gross profit on sales 



d. To ascertain the net 
profit on sales before 
considering general 
and administrative 
expenses 

e. To transfer balance 
from Marketing ac- 
count to the Admin- 
istration account 

/. To ascertain net 

profit or net loss 

from operations 
g. To transfer balance 

from Administration 

account to Profit and 

Loss account: 

If a net loss from 

operations 

If a net profit from 

operations 
h. To close incidental 

income to profit and 



No entry 



Accounts Receivable 
Sales 



Manufacturing account 
Specific factory expenses 
(including inventories 
of raw materials and 
work in process at be- 
ginning of period) 
Inventory Raw Materials 
Inventory Work in Process 

(at close of period) 
Manufacturing account 
Marketing account 

Manufacturing account 

Marketing account 

Inventory Finished Goods 
(at beginning of period) 
Sales 
Inventory Finished Goods 

(at close of period) 
Marketing account 
Marketing account 

Specific selling expenses 



Marketing account 

Administration account 



Administration account 
Specific administration 
expenses 



Profit and Loss 

Administration account 
Administration account 

Profit and Loss 
Specific Incidental Income 

Profit and Loss 



Finished Goods Inventory 
Work in Process Inventory 



Accounts Receivable 

Sales 
Cost of Sales 

Finished Goods Inventory 



(Obtained from cost cards) 



(Shown in 4a above) 



Marketing account 
Cost of Sales 

Sales 
Marketing account 



Marketing account 

Specific selling expenses 



Marketing account 

Administration account 



Administration account 
Specific administration 
expenses 



Profit and Loss 

Administration account 
Administration account 

Profit and Loss 
Specific Incidental Income 

Profit and Loss 



THE PRINCIPLES OF REVENUE ACCOUNTS 



369 



CHART 13. COMPARISON OF JOURNAL ENTRIES UNDER REVENUE 
ACCOUNTS AND A COST SYSTEM FOR THE MORE COMMON OPERATIONS 

(Continued) 



Transactions 


Entries under Revenue 
Account System 


Entries under a Cost System 


i. To close incidental 
expense to profit and 
loss 
j. To close net profit 
to surplus account 


Profit and Loss 
Specific Incidental Expen- 
ses 
Profit and Loss 
Surplus 


Profit and Loss 
Specific Incidental Expen- 
ses 
Profit and Loss 
Surplus 



Questions 

1. What are revenue accounts? 

2. Are revenue accounts different from operating accounts? 

3. Name some revenue accounts. What ones are typical of a manu- 
facturing plant? 

4. In the absence of a cost system, what important information per- 
taining to plant operations may be gleaned from facts assembled through 
revenue accounts? 

5. Describe the operation of an accounting system in which revenue 
accounts are used. 

6. Why is it necessary to prorate expenses to different departments 
when revenue accounts are used in closing? 

7. What are some bases used in the distribution of certain expense 
items applicable to several departments? 

8. Container cost may be considered as what type of expense in 
closing? Royalties? Doubtful accounts? Interest on mortgage? 

9. Through what revenue account should Purchase Discount be 
closed? Sales Discount? 

10. What is meant by the term "finished goods purchased?" How 
does it differ from raw materials in handling on the books and statements? 

11. Describe the nature of the work sheet which is prepared when 
revenue accounts are used in closing the books of a manufacturing 
concern. 

12. Should the adjusting journal entries be posted before or after the 
operating accounts are closed through the revenue accounts? 

13. Outline the nature of the closing entries prepared in connection 
with revenue accounts used in a manufacturing concern. 

14. How do revenue accounts provide control over plant operation in 
the absence of a cost system? 



CHAPTER XXV 

OPERATING STATEMENTS UNDER REVENUE 
ACCOUNTS 

1. The Problem of Operating Statements. 

After completion of a work sheet prepared under revenue 
accounts, data are available for the preparation of accounting 
statements. A variation in the form of the statement of 
income, profit and loss arises in connection with the manu- 
facturing concern. 

Frequently, two separate statements are made instead of a 
single statement. One is known as the statement of cost of 
production; the other the statement of income, profit and 
loss. Although the same information may be shown in a 
single statement, it is usually deemed more expedient to pre- 
pare the two statements and for the following reasons. In 
the first place, each divulges information more readily and 
forcibly when separate statements are shown. Of greater 
importance, however, is the fact that each of the statements 
discloses a cost which is distinctly different in nature: one 
the cost of production; the other the cost of goods sold. 

2. The Statement of the Cost of Production. 

This statement, which develops the cost of production, is 
sometimes called the statement of the cost of manufacturing. 
It includes all of the elements of cost raw material, direct 
labor, and overhead expenses, or those items appearing in the 
manufacturing column of the work sheet. 

In order to describe more clearly the principles involved 
in this statement, a model is shown as prepared from the work 
sheet in the preceding chapter. 

The statement of the cost of production is related to the 
function of manufacturing only. It shows the manufacturing 
cost applicable to the present period, which is useful in arriving 
at policies covering material, wages, and manufacturing 

370 



OPERATING STATEMENTS 371 

FORM 81 

THE PBNN ELEOTRIO ELIMINATOR COMPANY, 

STATEMENT OF THE COST OP PRODUCTION, 

Jan. 1, 19 to Dec. 31, 19 

Inventory, Raw Materials, Jan. 1, 19 $ 26, 782.44 

Purchases of Raw Materials $63,010.55 

Less: Purchases Returned and Allowances 3 , 469 . 1 1 

Net Purchases 59,541.44 

Raw Material Available for Use $ 86, 323. 88 

Inventory, Raw Materials, Dec. 31, 19 17,039.61 

Cost of Raw Materials Used $ 69,284.27 

Direct Labor 31,233.43 

Overhead Expenses 

Indirect Labor' $3,243.32 

Heat, Light, and Power 2 , 709 . 10 

Miscellaneous Factory Expenses 4 , 675 . 65 

Compensation Insurance 482. 10 

Telephone and Telegraph 45 . 71 

Insurance 1,197.00 

Depreciation on Buildings 733.48 

Depreciation on Machinery 2 , 465 . 57 

Total Overhead Expense 15 , 551 . 93 

Manufacturing Charges during Year 19 $116,069.63 

Inventory, Work in Process, Jan. 1, 19 1,463.63 

Total Charges to Production during Year 19 $117,533.26 

Inventory, Work in Process, Dec. 31, 19 1.711.83 

Cost of Goods Produced, Jan. 1, 19 to Dec. 31, 19 $115,821 .43 



overhead expenses. Description of the form and content 
of this statement is next considered. 

The cost of raw materials used in production should be 
shown clearly in the statement. This cost is determined by 
adding the inventory value of raw materials at the beginning 
of the year to the cost of the net purchases. From this total, 
representing the cost of raw materials available for use, is 
deducted the value of the raw materials inventory at the close 
of the year. The resultant balance is the cost of raw mate- 
rials used. 

Where freight and cartage on raw materials are factors for 
consideration, the expense item is placed in either one of two 
positions in the statement. The nature of the raw materials 
used in the plant make it the proper procedure to add freight 
and cartage charges to the purchase price under certain con- 
ditions. Under other circumstances the freight and cartage 
charges are properly placed under the manufacturing over- 
head expenses. 

Freight and cartage charges on specific items of raw mate- 
rials are considered as a cost to be added to the invoice price, 



372 COST FINDING FOR ENGINEERS 

where it is possible quickly and accurately to identify the 
freight, express, and cartage charges with the items of raw 
material purchased. This plan is always possible where the 
raw materials are bulky in nature, such as kegs of washers, 
bar and sheet steel, lumber, pipe, etc. Where a perpetual 
inventory is in operation, freight and cartage charges must be 
included in the unit prices of the raw material items affected 
by such charges. This is necessary in order that the Raw 
Materials account will receive the proper credit for materials 
requisitioned and charged into production. Freight and cart- 
age expense should be added to the net amount of raw material 
purchases in the statement of the cost of production where the 
conditions described in this paragraph exist. * 

Many items of raw material are so small, both in volume and 
value, that it is not practical to compute the amount of 
freight applicable to each unit. A purchase of 1,000 boxes of 
stove bolts, wood screws, and cotter keys of various sizes 
might be accompanied by an incoming freight charge of $^.54. 
Should the freight charge be spread over the material on the 
basis of the number of boxes received, or on the basis of the 
purchase price of the various items and sizes? The value in 
knowing the amount of freight applicable to a package of 
100 % X 2-inch Round Head Stove Bolts is not commen- 
surate with the clerical cost of computation. If the freight 
charges are arbitrarily added to the purchase price of raw mate- 
rials of this nature, unit prices are but estimates. Under such 
conditions the freight charges are better shown as a manufac- 
turing overhead expense in the statement of the cost of 
production. 

Following the figure showing the cost of raw materials used 
is placed the direct labor cost. The sum of these two elements 
of cost is sometimes known as " prime cost. " This term has 
lost its significance, however, because of the increasing impor- 
tance of manufacturing overhead expense in recent years. 

Overhead expenses should be itemized in the statement of 
the cost of production unless the number of such items pre- 
cludes itemization. In event of this situation, the manufac- 
turing overhead items should be shown in a separate exhibit 
attached to the statement. 

The caption " manufacturing charges' 7 during the year 19 , 
represents the elements of cost charged into production during 



OPERATING STATEMENTS 373 

the year, and does not include the accumulated costs repre- 
sented by the work in process inventory at the beginning of 
the period. To the total manufacturing charges comprising 
the three elements of cost charged into production during the 
period, is added the value of the inventory of work in process 
at the beginning of the year. This inventory value was 
inherited from the preceding period. As pointed out in Chap. 
XVIII, however, the inventory of work in process at the begin- 
ning of the period must be considered an additional cost of 
production applicable to the present period. This inventory 
value must be added to the elements of cost charged into 
production during the year to ascertain the total charges to 
production during the year. To arrive at the cost of goods 
produced, the inventory of the work in process at the end of 
the accounting period is deducted from the amount represent- 
ing the total charges into production during the year. The 
closing inventory of work in process is considered as an inven- 
tory value applicable to the following period, since it repre- 
sents the cost of uncompleted work unfinished jobs or orders 
which will not be completed until the next accounting period. 
This closing inventory value becomes an expense of the next 
accounting period. 

There is an optional plan for showing inventories in the 
statement of the cost of production and in the statement of 
income, profit and loss, other than as illustrated on pages 371 
and 375. Instead of showing both the opening and closing 
inventory values, only the difference may be stated. The rule 
is as follows: 

1. Where an inventory value is smaller at the end than at 
the beginning of the period, the decrease is added to the factor 
affected. 

2. Where an inventory value is larger at the end than at the 
beginning of the period, the increase is deducted from the 
factor affected. Certain sections of the statement of the cost of 
production appearing on page 371, will illustrate the principle. 

CASE 1. As SHOWN IN STATEMENT 

Inventory, Raw Materials, Jan. 1, 19 $ 26,782 .44 

Net Purchases 59,541.44 

Raw Materials Available for Use $ 86,323 .88 

Inventory, Raw Materials, Dec. 31, 19 17,039.61 

Cost of Raw Materials Used $69,284.27 



374 COST FINDING FOR ENGINEERS 

Optional Plan 

Net Purchases , $ 59,541 .44 

Inventory, Raw Materials, Jan. 1, 19 $26,782.44 

Inventory, Raw Materials, Dec. 31, 19 17,039.61 

Add decrease 9,742.83 

Cost of Raw Materials Used $ 69,284 .27 



CASE 2. As SHOWN IN STATEMENT 

# 

Manufacturing Charges during Year 19 $116,069.63 

Inventory, Work in Process, Jan. 1, 19 1,463.63 

Total Charges to Production during Year $117,533.26 

Inventory, Work in Process, Dec. 31, 19 1 ,711 .83 

Cost of Goods Produced $115,821 .43 



Optional Plan 

Manufacturing Charges during Year 19 $116,069.63 

Inventory, Work in Process, Jan. 1, 19 $ 1,463.63 

Inventory, Work in Process, Dec. 31, 19. . . 1,711.83 

Deduct Increase 248 . 20 

Cost of Goods Produced $115,821 .43 



3. The Statement of Income, Profit, and Loss. 

The statement of income, profit and loss, for a manufactur- 
ing concern, as a complementary statement to the statement 
of the cost of production is almost identical with a profit and 
loss statement for a trading concern. The only difference 
appears in the cost of goods sold section. In the profit and 
loss statement for a manufacturing establishment, the cost 
of production displaces purchases and freight and cartage, 
appearing in the trading statement. One should compare 
the statement appearing on page 153, Chap. X with the follow- 
ing statement, prepared from the work-sheet illustration used 
in the preceding chapter, in order to observe the contrast. 

One of the most important captions in the statement (Form 
82) is the "cost of goods sold." The value representing the 
"cost of goods sold" is related to the marketing of the product. 
It is useful in determining selling policies and prices. If more 
than one line of goods is handled, the cost of each line may be 
recorded. By also keeping record of the sales by different 
lines, it is possible to determine the gross profit on each line. 
This information will determine whether it is profitable or 
not to handle certain lines. 



OPERATING STATEMENTS 375 

FORM 82 

THE PENN ELECTRIC ELIMINATOR COMPANY 

STATEMENT OP INCOME, PROFIT AND Loss 

Jan. 1, 19 to Dec. 31, 19 

Net Sales $139,167.00 

Cost of Sales: 

Inventory, Finished Goods, Jan. 1 $ 10,417. 18 

Cost of Goods Produced during the Year . . . 115,821.43 

Cost of Manufactured Goods Available for Sale $126 , 238 . 61 
Inventory, Finished Goods, Dec. 31, 19. 15,977.94 

Cost of Manufactured Goods Sold 77777 $110,260.67 

Gross Profit from Sales $ 28,906.33 

Marketing Expenses: 

Compensation Insurance $ 70 .47 

Shipping Supplies and Expense 2,480.12 

Salesmen's Salaries and Commissions 10,837.78 

Advertising 787 . 13 

Freight and Express Out 1,368.24 

Stationery and Office Supplies 137.65 

Telephone and Telegraph 91 .42 

Postage 154 . 18 

Insurance 149 . 63 

Depreciation on Building 122 . 25 

Depreciation on Delivery Equipment 469.93 

Depreciation on Furniture and Fixtures. . . 43 . 73 $ 16,712.53 

" $~12,193.80 

General Administrative Expenses: 

Compensation Insurance $ 26 . 90 

Officers' Salaries 6,000.00 

Office Salaries 1 ,559 .20 

Stationery and Office Supplies 412 .97 

Telephone and Telegraph 91 .42 

Postage 231 .27 

Insurance 149 . 62 

Depreciation on Buildings 122 . 24 

Depreciation on Furniture and Fixtures. . . 102.02 $8 ; 695 . 64 
Net Profit from Operation $3,498.16 

Incidental Income: 

Commissions Earned $ 449 .40 

Purchase Discount J. , 226 . 13 1,675.53 

$5,173769 

Incidental Expense: 

Interest on Mortgage Payable $1 ,800.00 

Sales Discount 501 .78 

Doubtful Accounts 847.51 $3,149.29 

Net Profit to Surplus for the Year Jan. 1, 19 

to Dec. 31, 19 $2,024.40 



376 COST FINDING FOR ENGINEERS 

4. The Cost of Goods Produced versus the Cost of Goods 
Sold. 

There is a fundamental difference between these two cap- 
tions. The former is related to production, the latter to 
distribution. The relationship existing between the two 
captions may be stated in the following manner: 

a. Where the value of the cost of goods manufactured is 
greater than the cost of goods sold, it is usually caused by the 
production department producing goods faster than they are 
being sold, Or 

6. Where the value of the cost of goods manufactured is 
less than the cost of goods sold, the causes are usually: 

(1) The production department is not functioning properly, 
or 

(2) A special effort may been have made to dispose of goods, 
such as offering low prices or employing extra salesmen. 

6. Principles of Unit Cost Computation. 

It is quite obvious if the cost of production and the number 
of units produced are known quantities that the unit cost may 
be computed by dividing the total cost by the units produced. 
Unit cost should be carried out to at least four decimal places in 
order to effect more accurate inventory valuations. Ascer- 
taining unit cost in this manner presents no problem as far as 
the mechanical procedure is concerned, but there is another 
problem of far-reaching importance in connection with it. 
The problem pertains to the principles of operating expense 
distribution described in the preceding chapter. 

If an item is charged or credited to the Manufacturing 
account that does not properly belong to that revenue group, 
the cost bf production is misstated. Misstating the cost of 
production causes unit cost likewise to be misstated, which 
in return affects the value of the finished goods inventory at 
the close of accounting period. And if the closing finished 
goods inventory is misstated, the final net profit is also mis- 
stated. Inaccurate unit costs, therefore, bring about inac- 
curacies in both the statement of income, profit and loss 
and the balance sheet, by affecting finished goods inventory, 
net profit, and ownership. 

A combined comparative statement of the cost of production 
and income, profit and loss will illustrate the principles. 



OPERATING STATEMENTS 377 

The following facts are available in connection with the 
illustration under Case 1, Form 83 : 

Unit 

Units Value cost 

Inventory Finished Goods, Jan. 1, 19. . . 425 $ 10,417.18 $24.5110 
Produced during the year 4,632 115,821 .43 25.0046 

Available for Sale 5,057 $126,238.61 x 

Sales 4,418 139,167.00 x 



Inventory, Finished Goods, Dec. 31 639 $ 15,977.94 $25.0046 

All of the units contained in the beginning inventory Jan. 1, 
19 , were sold during the year. 

With a production of 4,632 units at a cost of $115, 821.43, and 
a unit cost of $25.0046, the finished goods inventory at the end 
of the year is valued at $15,977.94, which gives a net profit of 
$2,024.40. Compare these inventory and profit figures with 
Case 2. 

The only fact in Case 2 differing from Case 1 is that the 
interest on mortgage (on factory building) is considered as a 
manufacturing expense item. This expense item of $1,800 
increased the cost of production to $117,621.43. With no 
change in the number of units produced, the unit cost of 
production for the year amounts to $25.3932. This gives a 
finished goods inventory valued at $16,226.25, which results 
in a final net profit of $2,272.71, which is $248.31 greater than 
in Case 1. Thus, items which are included in manufacturing 
expense which are not purely manufacturing expense items, 
result in an inaccurate and misstated inventory figure and net 
profit for the period. 

In Case 3, but one fact differs from Case 1 and Case 2. 
It is the position of the purchase discount item. In Case 3, it 
is considered as a deduction from the original purchase cost, 
instead of an incidental income. The result is, of course, 
that of decreasing the cost of production which shows a figure 
of $114,595.30. With the same number of units produced, 
the unit cost is $24.7399, which gives a value of $15,808.80 
to the inventory of finished goods at Dec. 31, 19 . Using 
this inventory value causes the final net profit to be $1,855.26, 
or $169.14, less than the amount shown in Case 1. 



378 



COST FINDINO FOR ENGINEERS 



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380 COST FINDING FOR ENGINEERS 

A comparison of the three cases portrays the importance of 
being familiar with the nature of the items reflected in manu- 
facturing cost. Conservative accounting practice would 
advocate handling the items as shown under Case 1, or Case 3. 

6. Other Inventory Problems. 

Mention was made in Chap. XIII of the value of raw mate- 
rials inventory to be used when the market price was lower 
than cost at the close of the period. It was stated in that 
chapter that the cost value should be used in computing the 
cost of production, and that adjustment for the decrease in 
value should be made through the Profit and Loss account. 
The reason for this may be seen in the following comparative 
statements : 

FORM 84 

COMPARATIVE STATEMENT SHOWING PROFIT VARIATION DUE TO THE 

POSITION OF THE RAW MATERIAL INVENTORY, WHICH HAS A MARKET 

VALUE LOWER THAN COST VALUE AT THE TIME OF CLOSING 

Inventory, Raw Materials, Jan. 1, 19 $ 5,000 $ 5,000 

Net Purchases 60 , OOP 60,000 

Cost of Raw Materials Available for Use $ 65,000 $ 65,000 

Inventory, Raw Materials, Dec. 31, 19 8,000 (Cost) 6,000 (Market) 

Cost of Raw Materials Used $ 57,000 $ 59,000 

Direct Labor 75 , 000 75 , 000 

Overhead Expenses JHO ,000 110.000 

$242,000 $244,000 

Add a decrease in Work in Process Inventories 2 , 500 2 , 500 

Cost of Goods produced $244 , 500 $246.500 

(Production, 100,000 units) 

Unit Cost $2.445 $2.465 



Inventory, Finished Goods, Jan. 1, 19 $ 9,600.00 $ 9,600.00 

Cost of Goods Produced 244,500.00 246.500.00 

Cost of Goods Available for Sale $254 . 100 . 00 $256 , 100 .00 

Inventory, Finished Goods: 

Dec. 31, 19 (4,500 units at respective unit 

costs) $ 11.002.50 $ 11.092.50 

Cost of Sales $243,097.50 $245,007.50 

Sales 350.000.00 350,000.00 

Gross Profit $106,902.50 $104,992.50 

Marketing and Administrative Expenses 88,000.00 88,000.00 

Net Profit $ 18,902.50 $ 16,992.50 

Profit and Loss Charge /or decrease in Raw 

Material Inventory 2 , 000 . 00 

$ 16.902.50 $ 16,992.50 



Where the cost value of the raw material inventory, $8,000, 
is used, and the $2,000 decrease in cost is deducted as a profit 
and loss item, the net profit varies in an amount of $90 from 
the other illustration. The reason for this is that the finished 



OPERATING STATEMENTS 381 

goods inventory at Dec. 31, 19 (in the right-hand column) is 
overstated by $90. This means that the number of units 
remaining unsold at the close of the period reflects the over- 
stated unit cost of production. In showing the market value 
of the inventory, $6,000, the cost of raw materials used was 
overstated, and the unit cost was increased $0.02. The 
number of units in the inventory (4,500) units, multiplied by 
the overstated unit cost ($0.02) gives the same figure of $90, 
the overstated or unrealized profit. 

To adjust the inventory account to agree with the market 
value figure, where cost has been used in statement prepara- 
tion, the following general journal entry is required: 

Loss Due to Decline in Market Value of Inventory 

(Profit and Loss) $2,000 

Inventory $2,000 

To adjust the inventory so as to reflect 
market rather than cost value, at the 
date of closing, Dec. 31, 19 . 

In a real cost system, the inventory adjustment requires 
the use of an account Reserve for Market Decline in Inven- 
tory, in which the credit posting is made, rather than the 
credit being made direct to the Inventory account. 

7. Ascertaining Unknown Unit Quantities. 

In connection with the values of the cost of goods produced 
and the cost of goods sold, there arises the problem of ascer- 
taining unknown unit quantities. Unit quantities produced, 
sold, and in the inventories of finished goods at the beginning 
and at the close of the fiscal period may be unknown. But if any 
three of these items are known, the fourth or unknown quantity 
may be computed. Units available for sale can always be 
determined from the three given quantities. For ease in 
making reference to the five quantities, they will be numbered 
as follows: 

Number Item 

1 Inventory Finished Goods at beginning of period. 

2 Production during the period. 

3 Available for sale during the period. 

4 Sales during the period. 

5 Inventory Finished Goods at close of period. 

CASE 1 

Known quantities are items 1, 2, and 4. To find the number of units 
in the finished goods inventory at the close of the period: 



382 COST FINDING FOR ENGINEERS 



Number Item Name 
1 Inventory at beginning of period 
2 Produced during the period 
3 Available for sale 
4 Sales 
5 Inventory at close of period (?) 

CASE 2 

Known quantities are items 1, 2, and 5. To find 
sold during the period: 

Number Item Name 
1 Inventory at beginning of period 
2 Produced during the period 

3 Available for sale 
5 Inventory at close of period 
4 Sales during period(?) 


Units 

425 
4,632 

5,057 
4,418 


639 


the number of units 

Units 

425 
4,632 


5,057 
639 


4,418 


CASE 3 

Known quantities are items number 1, 4 and 5. To find the number of 
units produced during the period: 

Number Item Name Units 

5 Inventory at close of period 639 
4 Sales during period 4,418 


3 Available for sale 
1 Inventory at beginning of period 

2 Produced during the period (?) 


5,057 
425 


<4,632 


CASE 4 

Known quantities are items 2, 4 and 5. To find the number of units 
in the finished goods inventory at the beginning of the period: 

Number Item Name Units 
5 Inventory at close of period 639 
4 Sales during period 4,418 


3 Available for sale 
2 Produced during the period 

1 Inventory at beginning of period (?) 


6,057 
4,632 


425 



The important concept to remember in any of the computa- 
tions is always to arrive at the number of units available for 
sale. 



OPERATING STATEMENTS 383 

8. Preparing Monthly Operating Statements. 

The preparation of monthly operating statements presents 
no particular problems. Certain principles must be kept in 
mind, however, in their preparation. The procedure is to: 

1. Prepare a trial balance at the end of the month. 

2. Ascertain all adjustments pertaining to the business for 
the month. 

3. Prepare work papers. 

4. Prepare operating statements. 

5. Journalize and post adjusting journal entries (excepting 
the inventory values). 

The adjustments for each month are similar to those neces- 
sary at the end of a fiscal year except for the time period. 
That is, the depreciation charges for a month would be one- 
twelfth of the per annum charge. Doubtful accounts may be 
estimated on the sales for the month. Other expense and 
income items are likewise adjusted for the one-month period. 
Although adjusting entries (excepting for inventories) are 
posted to ledger accounts, no monthly closing entries are made. 
The purpose of preparing monthly statements is to apprise 
the management of the operating results from month to month. 
Waiting until the end of the year to learn of the financial con- 
dition of the business does not constitute adequate control. 
Monthly operating results will disclose operating inefficiencies 
and the existence of any malconditions which otherwise might 
not be noticed. 

Arriving at monthly inventory values constitutes the biggest 
problem of monthly statement preparation. If perpetual 
inventories are a part of the stores and warehouse records, 
as they should be, the monthly raw material inventory values 
are readily ascertained; if not, a physical count is the only 
accurate method available. 

A more difficult problem arises in connection with the work 
in process inventory. Unless a cost system is in operation, 
the closing value of the work in process must be estimated. 
The many expense items which enter into the cost of pro- 
duction make it difficult to value the uncompleted work in 
process unless individual costs on each order are collected. 

Finished goods inventory value may be approximated if no 
perpetual inventory is maintained. The value is computed 
monthly by multiplying the net sales for the month by the 



384 COST FINDING FOR ENGINEERS 

average rate of gross profit for a period of past years as already 
briefly described in Chap. XIX. That this method will give 
an inventory value approximately accurate is based on the 
principle that the rate of gross profit on sales never varies to 
any material amount from year to year. This is true if the 
rate of mark-on to the cost, for the purpose of setting selling 
prices, remains practically uniform from year to year. And 
this is generally the case in a competitive business. The 
average gross profit percentage for a period of several years 
multiplied by the sales for any one month, therefore, will give 
the estimated gross profit for the month. The difference 
between this amount and the net sales will give the estimated 
cost of sales. The inventory at the beginning of the period 
plus the purchases represents the cost of goods available for 
sale. The difference between the cost of goods available 
for sale and the cost of the sales equals the estimated value of 
the closing inventory of finished goods. 

Where the finished goods inventory is estimated monthly 
by this process, the value ascertained is not recorded in the 
ledger. It is merely used in the preparation of the work sheet 
and the monthly financial statements, which are only estimates. 

Questions 

1. Distinguish clearly between the cost of goods produced and the 
cost of goods sold. 

2. Outline the form of a statement of the cost of production, and 
describe each of its major divisions. 

3. When should freight and cartage on raw materials be treated as 
an additional cost of the raw materials, and under what conditions 
should the same expense be considered as a manufacturing overhead? 

4. Describe the handling of the work in process inventories in the 
cost of production statement. 

5. When the cost of production is shown in a separate statement, in 
what manner does the statement of income, profit and loss for a manu- 
facturing concern differ from that of a trading concern? 

6. What facts important to managerial control may be ascertained 
by comparing the relative values of the cost of goods produced and the 
cost of goods sold? 

7. In what manner is the unit cost of production computed? 

8. What is the effect upon net profit of charging an expense item 
erroneously to manufacturing expense? Describe thoroughly, step by 
step. 

9. What is the effect upon net profit of crediting purchase discount to 
manufacturing expense? Discuss fully. 



OPERATING STATEMENTS 385 

10. If a lower inventory figure than cost is used in the preparation of 
an operating statement, in what position should it appear in the statement 
in order that gross profit will not be misstated? 

11. The following factors in terms of units are involved in the prep- 
aration of the statement of income, profit and loss for a manufacturing 
concern : 

1. Inventory of finished goods at beginning of period. 

2. Inventory of finished goods at close of period. 

3. Production. 

4. Sales. 

a. Using your own figures for 1, 2, and 3, compute 4. 

b. Using your own figures for 2, 3, and 4, compute 1. 

c. Using your own figures for 1, 3, and 4, compute 2. 

d. Using your own figures for 1, 2, and 4, compute 3. 

12. Why are monthly operating statements prepared? 

13. What are the steps involved in the preparation of monthly state- 
ments? 

14. What is the inventory problem in connection with monthly closing 
for a manufacturing concern which has no cost system? 



PART V 
THE OUTLINE OF ADVANCED COST FINDING 

CHAPTER XXVI 
THE DYNAMIC USE OF COSTS 

The student who has mastered the technical phases of ele- 
mentary factory and general accounting, as covered in this 
book, must now realize that extensive and important aspects 
of factory accounting remain untouched. Not only must the 
cost accountant record and classify all of the outlays involved 
in production, but his more important function is to develop 
reports and present them to the management and engineers, 
in order to assist them in the formulation of plant policy and 
to enable them to guide and to control future developments. 

Two decades ago cost accounting did little more than offer 
a historic transcript of past cost events. Such transcripts 
often lagged so far behind the immediate production activities 
that they were of little value in solving the specific problems of 
the moment. 

This earlier period of cost accounting, however, has a real 
value in business that must not be overlooked. Early use of 
costs contributed much as a guide to proper selling prices for 
different products, and as an effective tool in assuring more 
scientific bidding. A study of business failures of this period 
shows that a large portion of those establishments who "went 
under" had no adequate cost system, while those who "weath- 
ered the gale" showed almost a unanimous use of cost account- 
ing as a necessary tool. 

Obviously, however, with cost activities almost entirely 
limited to the pricing field there was little interest manifested 
by the engineers in the science of costs. Engineering problems 
were intraplant ones where early cost procedures offered very 
little practical application. 

386 



THE DYNAMIC USE OF COSTS 387 

Fundamental changes in industry today are demanding 
new developments in cost accounting. The rapid trend into 
standardization, the development of high-speed tools with 
the consequent swift flow of product through the plant, and 
the rapid shift from manual to machine production have 
brought upon costs a tremendous responsibility. Costs 
must now measure internal plant performance. And what is 
more important, they must measure this performance in 
terms of predetermined standards. Thus, standard costs and 
budgets now must act as a barometer for plant managers, telling 
them specifically when, where, and why off-standard condi- 
tions exist. Further, they must be told the cost of these vari- 
ances from standard production, in terms of dollars and cents. 

These newer uses of costs are certain of evoking a live inter- 
est and enthusiasm from the progressive engineers. They are 
the ones who are responsible for the proper layout of machines 
and the flow of materials. They are the designers of the 
product and the methods of its manufacture. They establish 
the standard rates for labor, for materials, and for manufac- 
turing overhead expense. 

They, therefore, are certain of taking an active interest 
in such standard costs as measure in terms of money and 
performance of those activities for which they are directly 
responsible. 

Consider, if you will, the importance of costs to a production 
engineer if, daily or weekly, a report is given to him covering 
every costing center with detail analyses of any abnormal 
conditions. The live engineer will look to such costs reports as 
the one reliable source of information upon which he can base 
suggested changes and improvements. 

Once the engineer sees, and sees clearly, this close relation 
between costs and daily production, he will no more consider 
cost finding as a stale and frozen history of past events. 
Rather, he will hold his cost data as the most valuable source 
of information upon which the formulation of plant policies 
can be based. 

When forward looking engineers grasp the full significance 
of this phase of accounting, it will mean the dynamic use of 
costs. 

More and more it is recognized that costs are an essential 
tool of management, if the management is to comprehend 



388 COST FINDING FOR ENGINEERS 

accurately and completely all phases of production. Some 
of the benefits resulting from tBe operation of a cost system are 
the presentation of the data collected, which can be arranged 
to show: 

1. The cost of off-standard performance of each labor unit 
of the plant. 

2. The specific location of waste and its cost. 

3. The advantages in cost reduction coming where machines 
displace man power. 

4. The proper conserving of materials by perpetual control 
over all forms of inventory. 

5. The analysis of idle equipment and volume variance with 
its cost and its causes. 

6. The determination of when it is cheaper to buy than to 
make a commodity. 

7. The development of scientific salvaging and proper 
repair control. 

8. The systematic planning of production so as to secure the 
most rapid turnover of capital. 

9. The proper allocation of all overhead expenses so as 
to determine costs of specific products accurately. 

10. The budgeting of all outlays so as to keep expenditures 
within predetermined limitations. 

These ten benefits derived from the use of cost accounting, 
to which many others might be added, are dependent four 
square upon an adequate cost system fully understood and 
continuously used by the management. Without costs such 
activities as the above either go entirely unconsidered or 
incorrectly measured. 

In order that the student may understand fully the methods 
and procedures used to measure the benefits enumerated 
above, it is necessary to learn the practical application of the 
technical principles of accounting which are presented in this 
volume. To make these practical applications, it will be 
necessary to go further into the principles of cost accounting, 
which principles are needed in order to obtain a working 
knowledge of the elements of cost, the handling of inventories, 
and the functioning of the various types of cost systems. 

One of the most recent developments in the field of cost 
accounting is the use of standard costs and operating budgets. 
There is no more valuable or more interesting phase of the 



THE DYNAMIC USE OF COSTS 389 

newer uses of costs than this one of standard costs and budgets. 
Standard outputs, production targets, expense budgets, per- 
formance quotas, and the like have an established place in 
the modern plant. 

A sparkling piece of psychology is involved in the use of 
standards that should be understood by cost accountant, the 
engineer, and the management. Psychologists tell us that 
standards or "bogies" shift the determination of what shall 
constitute a fair day's work or output from subjective to 
objective factors. Bringing that statement out of its academic 
phraseology, we discover that no employee is capable of 
determining what a reasonable output shall be. His preju- 
dices, his habits, and his own interests preclude his finding 
what the output of a machine or a cost center should be. 
Research, scientific measurements, and experience must 
establish the fair standards. This work falls principally upon 
the engineers. 

Costs supplement these established standards by comparing 
actual performance with them and reducing all to a money 
basis. It is sufficient at this time to realize that the use of. 
these standards is of major importance in bringing workers 
to greater capacity. Something to shoot at not only increases 
the accuracy of one's shot, but adds zest and spirit to the 
game of shooting. Definite standards, therefore, pull up 
the worker to productive efforts that he formerly never realized 
he was capable of attaining. And because of this lift that 
standards give to industrial effort, considerable space is devoted 
to this subject in a cost accounting textbook. 

Another important phase of cost accounting is concerned 
with the proper presentation of costs. No matter how com- 
plete a cost system may be in its technical operations, it fails 
completely if the cost results do not meet the needs and the 
wishes of the plant executives, particularly the engineers. 
In short, the cost reports must be adapted to the need of the 
plant engineers and plant executives. 

Realizing the truth of this contention, much effort must be 
used in the proper shaping of cost reports to meet the needs of 
those who use them. It calls for an analysis of all executive 
and managerial effort throughout the plant in order to find 
what specific service a specific cost record can be, to a specific 
executive on specific problems. The extent to which cost pres- 



390 COST FINDING FOR ENGINEERS 

entations are adapted to the practical needs of the engineers 
and other plant officials is the extent to which cost accounting 
will become an effective and worthwhile tool of management. 

In following the outline of the higher cost principles, stand- 
ard and budgetary use of costs, and cost presentations, it is 
highly advisable that the student keep himself in touch with 
definite manufacturing plants in the neighborhood in which 
he lives. Only as the cost problems outlined in this chapter 
have a concrete application, to industries with which the student 
has at least definite acquaintance, do they succeed in impress- 
ing him as to their importance and as to their effectiveness in 
gaining better accounting control of industry. 

Intelligent use of cost data by the management and engi- 
neers is certain of bringing efficient and economical operation. 
It is incumbent upon the student of costs to follow carefully 
such procedures and such presentations as will make this 
intelligent use of costs possible. 

Questions 

1. What is the function of a cost department? 

2. When cost accounting first came into use what was the chief service 
it performed? 

3. What are the newer uses of cost finding and what factors brought 
them about? 

4. Why is the engineer interested in these newer uses of costs? 

5. A study of cost finding enables the student to comprehend more 
adequately what kind of production problems? 



PROBLEMS 



PROBLEMS 

Chapter U 

2-1. Classify the following names of accounts under one of the five 
subdivisions of the two major groups of accounts: 

Dividends Payable Finished Goods Warehouse 

Consulting Fees Earned Building Maintenance 

Small Tools Revenue from Disposal of By-products 

Prepaid License Fees Payroll Insurance 

Dues and Subscriptions Bonds Payable 

2-2. Set up accounts with the following business concerns in a ledger 
for a business which you are to assume that you own, and enter therein 
the transactions listed under each: 

United Engineering and Foundry Company: 

19 

Jan. 3. Purchased from them $6,410 

13. Sent a check to them 6 ,410 

19. Purchased from them 450 

28. Returned goods to them 250 

30. Purchased from them 1 ,940 

Rule and balance the account. 

C. M. Thomas: 

19 

Feb. 1. Sold to them $2,500 

3. Goods returned by them 500 

10. Sold to them 169 

11. Cash received 2,000 

20. Cash received 169 

21. Sold to them 1 ,120 

27. Sold to them 211 

Rule and balance the account. 

Mar. 3. Cash received $211 

16. Sold to them 477 

30. Sold to them 219 

31. Cash received 300 

Rule and balance the account. 

Brooks and Mahony: 

May 1. Purchased from them $2,670 

5. Returned purchases to them 100 

11. Cash sent to them ' 2,570 

Rule and balance the account. 

2-3. a. The following transactions occurred between you and the firm 
of Rush and Malone, which you are to enter in their account in your 
ledger and in your account in their ledger 



394 COST FINDING FOR ENGINEERS 

19 

Aug. 1. You sell them merchandise on account $3,000 

5. You receive back some of the merchandise because of 

substandard quality 50 

10. You receive a check from them for the balance owed 

to you 2,950 

15. You sell them merchandise on account 1 ,800 

20. You again sell them merchandise on account 2,200 

25. You receive a check from them 1 ,500 

30. You sell them merchandise on account 900 

Show the balance in each account and rule the accounts appropriately, 
fc. The following transactions occurred between you and the Acme 
Bolt Corporation, which you are to enter in their account in your 
ledger and in your account in their ledger: 
19 
Sept. 1. You purchase and receive merchandise from the 

Corporation on account $5,000 

7. You again purchase and receive merchandise from 

the Corporation on account 3,600 

9. You return merchandise to the Corporation received 

on Sept. 1, because of improper sizes 200 

15. You receive an allowance from the Corporation for 

goods damaged in transit 60 

20. You send the Corporation a check 4 , 740 

25. You purchase and receive merchandise from the 

Corporation on account 2,450 

30. You again purchase and receive merchandise from 

the Corporation on account 1 ,875 

Show the balance in each account, and rule the accounts appropriately. 
2-4. Enter the following transactions, all of which affect the receipt or 
payment of cash, in your Cash account only; balance the account and 
make the proper rulings after showing the balance: 
19 
Oct. , 1. You invest cash $12,000 

3. You purchase store equipment 1 ,373 

4. You buy an auto truck 800 

5. You send a check for auto license to the State Bureau 

* of Revenue 18 

7. You purchase merchandise 4 , 141 

8. You sell merchandise 2,212 

11. You withdraw for personal use 100 

14. You purchase merchandise 3 ,757 

15. You pay wages to employees 505 

18. You sell merchandise 1 ,500 

21. You purchase postage 10 

24. You pay telephone rent 5 

25. You receive payment from a customer who had pre- 
viously purchased from you on account 676 



PROBLEMS 39S 

28. You pay a bill for gasoline and oil used for auto truck 22 
31. You pay wages to employees 606 

2-5. Enter the following transactions, all of which affect the receipt of 
or payment of cash, in your Cash account only; balance the accoilnt and 
jnake the proper rulings after showing the balance: 

19 

July 1. K Steele invested cash $5,000 

1. Rent paid for June 100 

2. Auto license for year 48 

3. Purchased from May wood & Company 2,000 

4. Purchased auto truck 700 

8. Sales for week 1 ,000 

9. Auto insurance for year 70 

12. Auto supplies purchased 5 

12. Received from M. Morgan on account 500 

15. Sales for week 900 

16. Wages paid. . , 415 

20. Paid Sultan Supply Company, on account 1 ,500 

22. Sales for week 1 , 100 

22. Auto repairs 22 

27. Purchased merchandise 705 

29. Sales for week 800 

30. Purchased shop supplies 40 

31. K. Steele withdrew for personal use 85 

31. Wages paid 610 

2-6. You are requested to prepare a balance sheet to show the financial 
condition of the contracting business of T. M. Schenley, on Dec. 31, 19 . 
The available data from which you are to prepare the statement are as 
follows: land, $12,000; buildings, $29,000; cash, $18,000; notes owed to 
creditors $60,000; auto trucks, $30,000; securities owned, $20,000; 
owed to creditors on open account, $40,000; inventory of materials and 
supplies; $95,000; construction machinery, $150,000; customers owe on 
account, $90,000. 

2-7. T. G. Councilor began business on Mar. 1, 19 . He withdrew 
$30,000 cash from his personal account in the bank and placed it on 
deposit in the Steel City National Bank, this deposit representing his 
cash investment in the business. He also possessed title to a piece of 
land valued at $10,000, and a building erected thereon which was valued 
at $20,000, which he decided to use for his place of business, and there- 
upon considered it as a part of his investment. 

You are asked to prepare a statement of the financial condition at the 
outset of his business on Mar. 1. , 

On Mar. 31 of the same year, Mr. Councilor wished to know his 
financial condition, and also whether or not he had operated his business 
at a profit during the month. You collect the following data, from which 
you are again to prepare a statement of financial condition or a balance 
sheet. The bank statement showed a balance of $19,000 cash. There 
was an inventory on hand at a cost value of $13,300. Customers who 



396 COST FINDING FOR ENGINEERS 

had purchased on account still owe him $11,000. Councilor had pur- 
chased store equipment costing $9,000, for which he had given his written 
promise to pay within 90 days. During the month, he had bought an 
auto truck for which he paid $2,000 cash. Councilor still owed creditors 
an amount of $15,000 for merchandise purchased on account. The land 
and building were considered to have the same value as at the beginning 
of the month. 

Did Councilor make a profit or suffer a loss from operation? Explain 
how much, and how you computed the amount. 

Also give your answer on the following two assumptions: 

a. If Councilor had invested an additional $10,000 during the month, 
and if he had withdrawn $500 for personal use, would the profit or loss 
have been different? What, then, would have been his ownership? 

b. If Councilor had invested an additional $10,000 during the month, 
and if he had withdrawn $500 for personal use, which would have made 
the cash balance $28,500 instead of $19,000 on Mar. 31, would the profit 
or loss have been different? What, then, would have been his ownership? 

Chapter III 

3-8. Record the following transactions in ledger accounts: 
Jan. 1. D. P. Boone opened a wholesale auto supply store, investing 
$5,000 cash. 

3. Paid rent of $100 to Oakland Realty Company. 

6. Purchased $6,000 auto supplies from Star Supply Company 

on account. 
9. Sold auto supplies costing $1,000 to Moss Auto Company on 

account for $2,000. 
12. Returned $300 supplies to Star Supply Company because of 

defective parts. 

15. D. P. Booiie withdrew $50 cash for personal use. 
18. Moss Auto Company return $200 supplies purchased on the 

9th. 

21. Received a check from Moss Auto Company for $1,000. 
25. Sent a 6 per cent 30-day note to Star Supply Company in 

settlement of their account. 
30. Paid wages by cash, $300. 

3-9. Enter the following transactions in ledger accounts: 
Feb. 1. P. W. Pinkerton opened a chemical supply business, investing 
the following: 

Cash $20,000.00 

Land 10,000.00 

Building 30,000.00 

2. Sent a check to Pittsburgh Post for $125, for advertising 
space. 

4. Purchased and received a bill of chemicals from Standard 
Products Company, on account, $3,650, 1/10 n/30. 



PROBLEMS 307 

6. Sold American Steel Foundries goods on account, $960, 
2/10 n/30. 

8. Purchased auto truck from H. D. Jones Sales Agency, $950, 
paying $350 cash, and giving a note for settlement of the 
balance due in one year. 

9. Sent a check for $15 to Department of Revenue, for auto 
license. 

1 1 . Purchased office supplies on account from Alexander Brothers, 
$46, 2/10 n/30. 

13. Purchased and received a shipment of chemicals from Graham 
Chemical Company on account, $4,757, n/30. 

14. Paid Standard Products Company invoice of Feb. 4 in full 
less discount. 

15. American Steel Foundries returned for credit,, chemicals 
billed at $60. 

20. Sold Research Laboratories, Inc., a bill of goods, on account, 
$2,100, 2/10 n/30. 

27. Received a check for $500 on account from the American 
Steel Foundries. 

28. Paid wages for month, $600. 

3-10. Record the following transactions in ledger accounts: 
Feb. 1. Baker and Parker opened a business engaged in buying and 
selling scientific tools, appliances, and apparatus. Baker 
invested $20,000 cash, and Parker turned over to the business 
a piece of property, the land value of which was $5,000 and 
the building value was $15,000. 

2. The firm purchased $25,000 worth of merchandise on account 
from the Savoy Supply Company. 

3. Shelving, show cases, and other equipment were purchased on 
account from the Weston and Company, costing $6,000. 

4. Paid $600 cash to Pittsburgh Press for advertising. 

5. Sold to Rex Machine Company on account merchandise 
invoiced at $9,000, 2/10 n/30. 

15. Rex Machine Company paid their account less 2 per cent 

discount. 
18. Returned to Savoy Supply Company $1,000 merchandise 

purchased from them on Feb. 2. 
28. Gave Savoy Supply Company a note in settlement of their 

account in full. 

3-11. Record the following transactions in ledger accounts: 
Feb. 1. L. E. Walker opened a business dealing in draftsman's sup- 
plies, investing $10,000 cash. 

2. Paid $200 rent for the month to the Rialto Realty Company. 

3. Received a purchase of merchandise on account from Decker 
Supply Company, $10,000. 

4. Sold to Standard Steel Corporation on account supplies 
invoiced at $2,420. 

9. Standard Steel Corporation returned $220 worth of goods 
sold to them. 



398 COST FINDING FOR ENGINEERS 

13. Paid Decker and Company one-half of their bill, deducting 
1 per cent discount on the $5,000. 

14. Walker withdrew $100 cash. 

18. Purchased a motor delivery car from Castle Car Company, 
costing $700. Paid down $200 cash, the balance being 
settled by a note. 
28. Received a note from the Standard Steel Company in full 

payment of their account. 

3-12. Record the following transactions in ledger accounts: 
Feb. 1. B. Barter and H. Hogue engaged in a general construction 
business, each investing $50,000 cash. 

2. They paid $250 rent to Rex Realty Company for a storage 
warehouse and office. 

3. They received a contract from Noble-Turner Company for 
constructing a four-story building, the contract price being 
$200,000. 

5. They purchased a steam shovel from Marion Shovel Com- 
pany on account, net 30 days, $5,000. 

7. They purchased 2 trucks for $4,000, from Keystone Auto 
Company, paying $1,000 cash, and for the balance notes were 
given in settlement. 

8. They purchased $15,000 sand and gravel from Tri-Rivers 
Sand & Gravel Company, net 30 days. 

12. They purchased $10,000 cement from Universal Company, 
2/10 n/30. 

15. They paid wages amounting to $4,000. 

22. They paid Universal Company in full, deducting the discount. 
3-13. Enter the following transactions in ledger accounts: 

Feb. 1. E. A. Scott opened a machine shop, investing $20,000 in 
cash. 

2. He purchased machinery from Mesta Machine Company, 
paying cash $15,000. 

3. He paid $100 for rent to Forbes Realty Company for month. 

4. Scott purchased $5,000 worth of copper, brass, iron, anjd steel 
on account from General Metals, 1/10 n/30. 

15. Scott paid wages of $500. 

18. He sold a machine to American Machine Company for 

$1,800 net 30 days. 
20. Scott purchased lubricating oil and waste for use in shop from 

Moline Supply Company, $100, 2/10 n/30. 

23. He paid Pittsburgh Press $25 for advertising. 

25. Scott withdrew $150 cash for personal use. 

26. He paid $90 to J. M. White for machinery repairs. 

28. Scott purchased $6,000 castings from American Steel Foun- 
dries, 1/10 n/30. 

3-14. Enter the following transactions in ledger accounts, the titles, 
of which are to be designated by you : 

July 1. H. Osborn enters the chemical supply business, making an 
initial cash investment of $8,000. 



PROBLEMS 399 

2. Rent of $150 for the month is paid in cash to Rental Agency, 
Incorporated. 

3. A check for $125 is sent to the Pittsburgh Press for advertis- 
ing the new business establishment. 

4. A check for $15 is given to Duquesne Light Company as a 
service deposit. 

6. Chemical supplies are received from the Rex Laboratories, 

the invoice totaling $2,850, on account, n/30. 
8. A delivery truck is bought from the Steel City Auto Company 
at a purchase price of $942, payment for which is as follows: 
cash, $342; notes payable, $600. 

10. Sent a check for $16 to the Pennsylvania Department of 
Revenue for truck license for the year. 

13. Chemical supplies are purchased and received from Noble- 
Lind Company, on account $3,850, terms 2/10 n/30. 

13. Purchased and received cartons, paper, twine, and other ship- 
ping supplies from Forbes Paper & Cordage Company, $205, 
on account. 

15. Sold to the Allegheny Steel Company, a bill of goods on 
account, $857, terms 1/10 n/30. 

16. Purchased lumber and nails for shelves in storeroom on 
account from McCrady-Rodgers, $116, 2/10 n/30. 

17. Returned to Rex Laboratories defective supplies invoiced at 
$150. 

18. Wages and salaries for the first half of the month are paid, 
$900. 

20. Sold to the Board of Public Education a bill of goods on 
account, $1,872, terms 1/10 n/30. 

22. Purchased office supplies from George & Sons, giving them a 
check for $42.50. 

23. Sold to the Testing Laboratories, Inc., a bill of goods on 
account, $769, terms 1/10 n/30. 

24. Sent a check to Noble-Lind Company in settlement of their 
account in full less thef discount. 

26. Received a check from the Allegheny Steel Company in full 

settlement of their account less the discount. 
29. Sent a 30-day 6 per cent note to Rex Laboratories in full 

settlement of their account. 
31. Wages and salaries for the last half of the month are paid, 

$925. 

3-16. Enter the following transactions in ledger accounts, the titles of 
which you are to designate: 

Apr. 1, R. H. Gorham and E. D. Mozier entered the road building 
business. Each invested $40,000 cash, which was placed on 
deposit in the Culver National Bank. 

2. Drew a check on the Culver Bank for $100 to be used as a 
petty cash fund. 

3. Paid office rent for month to the Melrose Estate, $50, and 
warehouse rent for month to H. R. King, $100. 



400 COST FINDING FOR ENGINEERS 

4. Purchased and received construction equipment, costing 
$75,000. One-half of the amount is paid by cash, and for 
the remainder notes are given at 6 per cent, payable in equal 
installments over a 12-month period. 

5. A contract is awarded to the firm by the City of Pittsburgh 
for the paving of five miles of city streets, the contract price 
being $160,000. Debit Contracts Receivable and credit 
Contracts Uncompleted. 

7. Office equipment is purchased on account from the Nu-Way 
Equipment Corporation, $416, terms 2/10 n/30. 

8. Bought postage amounting to $10 from petty cash fund. 

9. Sent a telegram to the Edgewater Steel Company, which is 
paid from petty cash, $1.10. 

10. Paid wages to laborers, $2,942.75. 

12. Received 4 carloads of sand from the Hill Sand and Gravel 
Company, on account, $600, 1/10 n/30. 

13. Paid freight on sand to P. R. R. Company, $200. 

14. Purchased 500 gallons gasoline for use in tractors, shovels, 
and trucks, from the Gulf Refining Company, $80, n/30, on 
account. 

15. Received 6 carloads of gravel from Hill Sand and Gravel 
Company on account, $620, 1/10 n/30. 

16. Paid freight on gravel to P. R. R. Company, $250. 

17. Paid wages to laborers, $3,950.25. 

19. Received 2 carloads of cement from the Davison Coke & Iron 
Works on account, $1,200, 2/10 n/30. 

20. Paid freight on cement to P. & L. E. R. R., $150. 

22. Paid Hill Sand & Gravel Company's invoice of Apr. 12, less 
discount. 

24. Paid wages to laborers, $4,500. 

25. Paid Hill Sand & Gravel Company's invoice of Apr. 15, less 
discount. 

26. Received bill for $42.20, from Center Avenue Garage for 
repairs to truck. 

28. Received 10 carloads of sand and 20 carloads of gravel from 
Norse Dredging Company, $4,200, 1/10 n/30. 

29. Paid Davison Coke & Iron Works, account in full. 

30. Paid wages to laborers, $6,000. 

It is estimated that the contract is one-fifth completed, and a 

proportionate amount of the income earned is to be shown at 

this date. 

3-16. Enter the following transactions in properly named accounts: 
Mar. 1. J. L. Mahony deposited $10,000 cash in the Bluff National 

Bank as his original investment in a small hand tool business. 

2. Paid $200 rent for the store room to the Noble Trust Com- 
pany for March. 

3. Purchased store shelving, counters, and display cases from 
Powell-Mason Company on account, the invoice amount 
being $1,950. 



PROBLEMS 401 

5. Purchased a cash register, office safe, typewriter, table and 
chairs from the Nu-Style Equipment Company for $1,140 
cash. 

6. Received a shipment of small hand tools from the Standard 
Tool Company on account, $4,600, terms 1/10 n/30. 

8. Purchased an auto truck from the Samson Sales Agency for 
$950. A first payment was made by cash, $350, and a note 
was given for the remaining balance payable in 12 equal 
monthly instalments. 

9. Sent a check for $15 to the State Department of Revenue for 
an auto license. 

10. Purchased 20 gallons of gasoline for the truck, paying $3.60 

cash. 
12. Received a shipment of tools from the Tru-Tool Company, 

Inc., on account, $5,400, terms 1/10 n/30. 
14. Cash sales for the week ended this date amounted to $1,150. 
16. Paid wages to store and office clerks, $250. 
18. Sold tools to Memphis Machine Company on account, 

$1,200, 2/10 n/30. 

20. Paid cash for insurance policies as follows: 

Store and office equipment (3 years) $360 

Merchandise (1 year) 300 

Auto fire and theft (1 year) 24 

Public liability and property damage on auto (1 year) 108 

21. Cash sales for the week ended this date amounted to $836. 

22. Paid the Tru-Tool Company, Inc., invoice in full less dis- 
count. 

23. Sold tools to the L. & N. R. R. on account, $737, 2/10 n/30. 

25. Purchased tools from S. O. Long & Company, on account, 
$3,828, 1/10 n/30. 

26. Purchased sundry store supply items from Newlin Paper & 
Cordage Company, paying cash, $90. 

28. Received a check in full less the discount from the Memphis 
Machine Company. 

29. Mahony withdrew $100 cash for personal use. 

30. Gave a 30-day 6 per cent note to the Standard Tool Com- 
pany. 

31. Paid wages to store and office clerks, $250. 

31. The L. & N. R. R. returned goods valued at $41 which were 
shipped to them on the 23rd. 

Chapter IV 

NOTE TO INSTRUCTOR: Have the students retain the corrected solutions 
to any of the first five problems in this chapter to be used as a basis for 
posting and trial balance exercises in connection with Chap. V. 

4-17. Enter the following transactions in the proper books of original 
entry: 



402 COST FINDING FOR ENGINEERS 

Feb. 1. B. H. Potts opened an electrical supply store, investing the 
following: 

Cash ................................... $ 4,000 

Auto Truck ............................. 500 

Land ................................... 5,000 

Building ................................ 10,000 

3. Purchased gasoline and oil for operation of truck, paying 

cash, $5. 
6. Paid $10 cash to K. T. Bornman for removing rubbish from 

the building. 
6. Purchased electrical supplies on account from the Streamline 

Appliance Company, $6,000, 2/10 n/30. 

8. Purchased electrical supplies on account from the National 
Electric Company, $4,000, 1/10 n/30. 

9. Sold M. & M. Supply Company on account, $1,000, 2/10 
n/30. 

12. Returned $200 supplies to National Electric Company. 

15. B. H. Potts withdrew cash to the amount of $90. 

18. Sent check to National Electric Company in settlement of 

one-half of balance, less discount. 
20. Received check from M. & M. Company in full settlement of 

their account, the discount being deducted. 
22. Sold merchandise on account, 2/10 n/30, to the following: 

Knotts and Mars .......................... $1 ,850 

Excelsior Supply Company ................. 2, 166 

24. Sold old crating and boxes for $6 cash. 

26. Wages paid to employees, $160. 

28. Settled the balance owed the National Electric Company by 

sending them a 60-day 6 per cent note. 

4-18. The following transactions are to be recorded in the cash receipts 
journal, the cash disbursements journal, the purchase journal, and the 
general journal. At the end of each mooth you are to total and rule each 
journal as the occasion requires. 

Jan. 3. You enter the contracting business in partnership with A. B. 
Combs. Each of you invest $25,000 in cash. 

15. The firm buys a piece of land for a storage yard, paying 
$6,000 cash. 

16. Paid Decker and Jones, attorneys, $75 cash for fees in con- 
nection with the purchase of the land. 

17. Let a contract to Capital Construction Company to build a 
warehouse and equipment shed for a consideration of 
$9,000. 

Feb. 4. Purchased and received from Knox & Company equipment 

to be used in contracting work, $25,000, terms, 90 days net. 

5. Paid freight on equipment received to the B. & 0, R. R., 



28. Paid wages, $300. 



PROBLEMS 403 

Mar. 1. Received a contract from Center Township for building 
5 miles of road at the bid price of $75,000. Work is to com- 
mence Apr. 1. 
Apr. 6. Warehouse is completed and Capital Construction Company 

is given a check for $9,000. 
6. Paid cash to C. E. Adams for 3 years insurance on warehouse, 

$240. 
16. Wages for first half of April, $3,000, paid by cash. 

25. Received a carload of cement from Portland Mills, $500, 
n/30. 

26. Received 10 carloads of crushed stone from Nemo Stone 
Company, $1,000, 1/10 n/30. 

28. Received 20 carloads of sand from Channel Sand & Gravel 

Company, $1,500, 2/10 n/30. 

30. Paid wages for the last half of the month, $3,600. 
May 1. Portland Mills allowed you $30 on account for hardened 

cement which was unfit for use. 

6. Paid Nemo Stone Company in full, deducting the discount. 
8. Paid Channel Sand & Gravel Company in full less the dis- 
count. 

15. Paid wages, $4,000. 

22. A bill is received from Abbott Service Station for gasoline 
and oil used in operating trucks and shovel, $60.80. 

30. Received a check for $15,000 from Center Township as part 
payment of contract for work completed. 

Received a check for $150 from G. A. Norris for dirt fill 
hauled to his property. 

31. Paid wages, $4,300. 

4-19. Enter the following transactions in the proper special journals: 
Sept. 1. N. K. Davis opened a miners' and machinists' supply business. 
He invested $25,000 cash, and turned over to the business a 
piece of land which he valued at $5,000 and a building 
valued at $20,000. 

2. Purchased from the Canton Industries Company on account, 
coal drilling machines, $13,500, 1/10 n/30. 

3. Paid freight on machines to P. R. R. Company, $186. 

5. Purchased office equipment on account from Steel Fixtures 
Company, $1,500, 1/10 n/30. 

6. Paid freight on office equipment to B. R. & P. R. R., $40. 

7. Sold to Champion Coal Company on account drilling 
machinery, $4,400, 2/10 n/30. 

8. Received from Standard Tool Company machinists' tools 
purchased on account, $3,475, 1/10 n/30. 

9. Purchased office supplies from the Office Supply Company, 
paying cash $47. 

10. Purchased a delivery truck from the Craig Auto Company, 

paying cash $800. 
12. Paid C. G. Conway $72 for the following: obtaining from 

the State, auto license for one year, $18; and auto insurance 

for one year, $54. 



404 COST FINDING FOR ENGINEERS 

Paid Canton Industries Company invoice of September 2 
less discount. 

13. Sold Mesta Machine Company on account tools invoiced at 
$2,000, 2/10 n/30. 

14. Returned to Standard Tool Company for credit tools 
invoiced at $75. 

15. Purchased mining equipment from Ohio Valley Manufac- 
turing Company on account, $27,000, 1/10 n/30. 

Paid invoice of Sept. 5 to Steel Fixtures Company in full 
less discount. 

16. Paid warehouse and selling wages, $740; office salaries, $360. 

17. Received a check from Champion Coal Company, which 
pays their account in full, the discount being deducted. 

20. Purchased from Rochester Mining Supply Company on 
account mining equipment, $10,890, 1/10 n/30. 

23. Sold mining equipment to Shick Shinney Collieries on 
account, $4,750, 2/10 n/30. 

24. Paid freight on shipment of Sept. 23 to P. R. R. Company, 
$111. 

26. Sent a check for $275 to Coal Operators Magazine for adver- 
tising space. 

27. Sent a check for $15 to Dr. J. C. Green for medical services 
given to injured warehouse employee. 

28. Sent a check for $25 to Employers' Liability Insurance Com- 
pany as a down payment on employees' compensation insur- 
ance policy. 

29. Sold mining equipment to Castle Shannon Coal Company on 
account, $3,737, 2/10 n/30. 

Received a 30-day 6 per cent note from the Mesta Machine 
Company in full settlement of their purchase of Sept. 13. 

30. Paid warehouse and selling wages, $800, and office salaries, 
$360. 

4-20. Enter the following transactions in the proper special journals; 

Dec. 1. D. D. Kennedy and G. W. Esterly formed a partnership for 
the purpose of trading in fuel and building supplies. Ken- 
nedy invested $15,000 cash, and Esterly invested $10,000 
cash in addition to turning over a piece of ground to be used 
for a storage yard valued at $5,000. According to the 
partnership agreement, profits and losses are to be divided 
equally. 

2. Received two carloads of lumber from the Yazoo Lumber 
Company, $3,200, 1/10 n/30. 

3. Received a carload of cement from Davison Coke and Iron 
Company, $500. 1/10 n/30. 

4. Paid $50 for a tarpaulin to cover the cement until a shed 
could be built for the building materials. 

6. Purchased a delivery truck, paying cash, $1,800. 

Sent check for $48 to Department of Revenue for truck 
license. 



PROBLEMS 405 

7. Received 2 carloads each of sand and gravel from Ohio Sand 

Company, $400, 1/10 n/30. 
9. Received a bill for builders' hardware from Imperial Supply 

Company, $510, 2/10 n/30. 

11. Sold builders' supplies to Harris & Main, $600, 2/10 n/30. 

12. Paid invoice to Yazoo Lumber Company, the discount being 
deducted. 

16. Paid payroll as follows: 

Yard employees $100 

Workmen engaged in erecting storage building . . 450 

17. Sold builders' supplies to Norman Construction Company, 
$480, 1/10 n/30. 

21. Received a check from Harris & Main in full of their account 

less the discount. 
31. The building materials taken out of stock for building the 

storage building are valued at cost, $2,500, at selling price 

$3,750. The payroll is paid as follows: 

Yard employees $100 

Workmen engaged in erecting storage building . . 700 

4-21. Enter the following transactions in the proper special journals: 
Oct. 1. B. T. Milburn deposited $8,000 in the Dormont National 
Bank as an original investment in a fuel business. 

2. Purchased two delivery trucks costing $2,400, of which $600 
cash was paid and the balance settled by a note payable, 
payable in equal installments over a period of one year. 

3. Purchased a plot of ground from E. M. Steman, paying 
$1,300 cash. 

4. Paid M. H. Jones, attorney, $50 for legal fees in connection 
with the purchase of the ground to be used for a storage yard. 

5. Sent a check for $40 to State Department of Revenue for 
auto licenses. 

Gave a check for $2,500 to the B. & O. R. R. for the con- 
struction of a trestle and side track to be used in dumping fuel 
in storage bins. 

7. Received 2 carloads of mine run and 1 carload of lump coal 
from the Shannon Coal Company on account, $375, 1/10 
n/30. 

8. Paid freight on coal to B. & O. R. R., $39. 

10. Sold 20 tons mine run coal to Marion Apartments Corpora- 
tion on account, $70, 2/10 n/30. 

14. Received bill for $296, 1/10 n/30, from South Side Lumber 
Company for lumber used in building storage bins. 

15. Paid wages to employees, $120. 

17. Paid carpenters $224 for building storage bins. 

Sent a check to the Shannon Coal Company in full of amount 
owed less the discount. 



406 



COST FINDING FOR ENGINEERS 



18. Purchased and received 3 carloads of mine run, 2 carloads of 
lump coal, and 1 carload of slack coal from Freeport Coal 
Company on account, $750, 1/10 n/30. 

19. Paid freight on coal to B. & O. R. R., $84. 

21. Sold 50 tons lump coal to R. 0. Carson on account, $200, 

2/10 n/30. 

Received check from Marion Apartments Corporation for 

their account in full less discount. 
23. Sales for the day were as follows, both on account, terms 

2/10 n/30: 

Henderson Contracting Company, 30 tons slack. $ 75 
Central School Board, 50 tons mine run coal. . . . $175 

25. Received a carload of coke from Davidson Coke & Iron 
Works on account, $200, 1/10 n/30. 

26. Sent a check to the Post Gazette Publishing Company for 
advertising, $60. 

27. Received a bill from Forbes Garage Company for gasoline 
and oil used during the month, $37.50. 

28. Received cash for sale of mine run coal made to a local ped- 
dler, $12. 

29. Received telephone bill and paid same to Bell Telephone 
Company, $8.25. 

30. Paid wages by cash, $130. 

4-22. The following transactions were recorded during the month of 
November, 19 , in the ledger of H. O. Bond. 



Cash 



$5,000 

100 

100 



$1,000 

2,500 

150 

100 

90 

500 

15 



Railroad Siding 



$2,500 



In Freight 



150 
100 



Wages 



90 



Storage Yard 



$6,000 



Delivery Truck 
$6,000 j 



Purchases, Coal 



500 
400 



Moran & Meyer 



200 



100 



H. M. Olsen 



155 



H. O. Bond, Capital 



$5,000 
6,000 



Notes Payable 



$5,000 



Luzerne Fuel Co. 



500 



500 
400 



Sales, Coal 



200 

100 
155 



Auto Expense 



15 



PROBLEMS 407 

Coal on hand, Nov. 30, was valued at $950. 

From the above accounts and closing inventory, you are to prepare: 

a. Statement of income, profit and loss. 

&. Statement of ownership. 

c. Balance sheet. 

4-23. From the account balances listed below, you are to prepare the 
following statements: 

a. Statement of income, profit and loss. 
6. Statement of ownership. 
c. Balance sheet. 

Cash $ 3,344.96 

Land 5,000.00 

Building 10,000.00 

Delivery Truck 950. 00 

Notes Payable 6,742.00 

Judson & Sons (Account Payable) 3 , 013 . 20 

Pratt Lumber Company (Account Receivable) 3,413. 10 

M. Jones, Capital 20,000.00 

M. Jones, Withdrawal 50. 00 

Sales 7,922.87 

Purchases 14,685.20 

Wages 225. 00 

Auto Expense 42 . 56 

Office Expense 30. 00 

Sales Discount 36 . 45 

Purchase Discount 99. 20 

The inventory of merchandise at the end of the period amounted to 
$7,183.34. 

4-24. You are engaged in the manufacturing business. Your account- 
ing system has five books of original entry, namely, the cash receipts, 
cash disbursements, purchases, sales, and general journals. Under the 
following headings, you are to list the transactions given below: 

1. Name of journal in which transaction is recorded. 

2. Name of account debited and amount. 

3. Name of account credited and amount. 
Jan. 1. Invested $7,500 cash. 

2. Received a shipment of raw materials from Lakewood Sup- 
ply Company, amounting to $5,000 for which a 6 per cent 
90-day trade acceptance (a note) was signed and given to 
them. 

Paid the P. & L. E. R. R. Company $165 for freight on 
above shipment. 

15. Received a bill from the Star Roofing Company for repairs 
to building roof to the amount of $219. 

20. Sold Bailey-Jones Company a bill of goods, $2,000, 1/10 
n/30. 
Paid freight on above shipment to B. R. & P. R. R. for $91. 

30. You withdrew $100 cash for personal use. 



408 COST FINDING FOR ENGINEERS 

Feb. 15. $15 worth of merchandise (purchases) was used as office 

supplies. 
Mar. 1. Purchased and received a piece of machinery for $1,500 cash. 

2. Paid $100 freight on machinery to P. R. R. Company. 
Apr. 2. Paid Lakewood Supply Company for trade acceptance, 

including $75 interest. 

Chapter V 

NOTE: Use any of the first five problems in Chap. IV as a basis for 
making postings from the journals to ledger accounts and for preparing 
trial balances. 

6-26. Record the following transactions in the proper books of original 
entry, then make the postings to the ledger accounts, and prepare a trial 
balance. 

June 1. R. R. Banks entered the electrical contracting business 
investing $8,000 cash which he deposited in the Forbes 
National Bank, and an auto truck valued at $500. 

2. Purchased materials on account from Zig Zag Electric Com- 
pany, $3,856.50, terms 1/10 n/30. LeBarthe Supply House, 
$4,855.19, terms 2/10 n/30. 

3. Paid rent for month to J. G. Owens, $75. 

5. Sold on account, terms n/30, to Wagner & Carey, $895.40; 
Steinway Electric Company, $2,168.75. 

11. Sent check to Zig Zag Electric Company for $2,000. 

15. Received check from Steinway Electric Company for $1,500. 
25. Wagner & Carey returned goods for which a credit memoran- 

dum x for $50 was sent to them. 
30. Sent LeBarthe Supply House a 30-day 6 per cent note dated 

June 30 for $4,000. 

6-26. Record the following transactions in the proper journals: 
19 

Feb. 1. R. C. Blackburn had received a patent on a new locking 
device prior to this date. He decided to engage in the 
manufacture of the device, and, accordingly on this date, he 
invested $10,000 cash and placed the patent in the business 
which had cost him $5,000. 
2. Rent of $200 is paid to A. M. Cole. 

4. An auto truck is purchased for $1,500 cash from Howe Sales 
Agency. 

5. Sent a check for $25 to the Department of Revenue for auto 
license. 

8. Purchased and received raw materials costing $5,000 from 
Cortex Manufacturing Company on account, 2/10 n/30. 

12. Purchased and received raw materials costing $8,000 from 
Van-Dyke Company on account, n/30. 

15. Purchased gasoline and oil for $20 cash from Oliver Oil Com- 
pany. 

18. Sold $3,000 worth of finished products to Moss-Nixon Com- 
pany on account, 1/10 n/30. 



PROBLEMS 409 

Sent a check to Cortex Manufacturing Company in full of 
account less discount. 
24. Sold $5,000 worth of finished goods to Olean Manufacturing 

Company on account, 1/10 n/30. 
28. Received a check from Moss-Nixon Company in full of 

account less discount. Paid payroll to laborers, $3,000. 
Make the postings to the ledger accounts, and prepare a trial balance. 
6-27. Enter the following transactions in the proper books of original 
entry, make the postings to the ledger accounts, and prepare a trial 
balance. 

Feb. 1. P. W. Pinkerton opened a chemical supply business, investing 
the following: 

Cash $20,000 

Land 10,000 

Building 30,000 

2. Sent a check to Pittsburgh Post for $125, for advertising 

space. 
4. Purchased and received a bill of chemicals from the Standard 

Products Company on account, $3,650, 1/10 n/30. 
6. Sold American Steel Foundries goods on account, $960, 2/10 

n/30. 

8. Purchased auto truck from H. D. Jones Sales Agency, $950, 
paying $350 in cash, and giving a note for the settlement of 
the balance due in one year. 

9. Sent a check for $15 to Department of Revenue for auto 
license. 

1 1 . Purchased office supplies on account from Alexander Brothers, 
$46, 2/10 n/30. 

13. Purchased and received a shipment of chemicals from Graham 
Chemical Company on account, $4,757, n/30. 

14. Paid the Standard Products Company invoice of Feb. 4 in 
full, deducting the discount. 

15. American Steel Foundries returned chemicals valued at $60. 
20. Sold Research Laboratories, Inc., a bill of goods on account, 

$2,100, 2/10 n/30. 

27. Received a check for $500 on account from the American 
Steel Foundries. 

28. Paid wages for the month, $600. 

5-28. Enter the following transactions in the proper books of original 
entry, post to ledger accounts, and prepare a trial balance. 

00t. 1. W. G. Fritz and E. N. Montague opened a general supply 
house, specializing in railroad supplies. They made initial 
investments as follows: ' 

W.O.Fritz 

Cash $32,000 

Auto Truck 500 



410 COST FINDING FOR ENGINEERS 

E. N. Montague 

Cash 15,750 

Office Equipment 500 

2. Purchased a piece of property for use as an office and ware- 
house from the Valley Realty Company, paying cash $15,000. 
The land is valued at $4,000, and the building $11,000. 

3. Paid $50 cash to M. H. Jones for legal fees in connection with 
the purchase of the property. 

4. Purchased trucks and other equipment for use in the ware- 
house for handling supplies. The invoice from the Melwood 
Manufacturing Company amounted to $390, 1/10 n/30. 

5. Received a shipment of railway supplies from Townsend 
Tinware Company, on account, $6,840, 1/10 n/30. 

Sold a bill of goods on account to P. & W. V. R. R. $200, 
1/10 n/30. 

7. Purchased and received two carloads of cotton waste from 
the Colonial Cotton Company, $2,400, 2/10 n/30. 

8. Paid H. A. Kinsel for fire insurance policies covering building 
building for three years, $72, on merchandise stock for one 
year, $108. 

10. Sold to Erie R. R. Company a bill of goods, $350, 1/10 

n/30. 
12. Purchased and received miscellaneous railroad supplies from 

Beaver Falls Supply Company on account, $6,200, 1/10 

n/30. 

14. Sold to D. L. & W. R. R. Company a bill of goods, $960, 
1/10 n/30. 

15. Paid $52.75 to C. T. Barnes for repairs to building. 

Sent a check to Townsend Tinware Company in settlement 
of $6,800.00 less discount. The remaining balance covers 
goods on which controversy has arisen about the quality, 
and for which a later settlement is to be made. 

16. Paid wages to salesmen, $450; warehousemen and truck 
driver, $500; office clerks, $300. 

18. Received a bill from Highway Service Company for towing 
and a new battery for automobile, $18. 

21. Received check from Erie R. R. for goods sold them on 
Oct. 10, the discount being deducted in settlement. 

22. Sold B. & O. R. R. Company a bill of goods, the invoice total- 
ing $1,267, 1/10 n/30. 

Mr. Fritz withdrew $50 cash for personal use. 

23. Sent check to Beaver Falls Supply Company in full settle- 
ment of account less the discount. 

24. Received check in full settlement of account with D. L. & 
W. R. R. Company less the discount. 

25. Paid $20 for postage. 

26. Sold P. R. R. Company a bill of goods invoiced at $3,100, 
1/10 n/30. 



PROBLEMS 411 

28. Purchased and received railroad supplies from the G. M. 
Markus Company, on account, $8,400, 1/10 n/30. 

29. Purchased and received shipping supplies from Kress Box 
Company on account $660, 1/10 n/30. 

30. Received a credit memorandum from Townsend Tinware 
Company for $20, with their instructions to ship the defective 
supplies amounting to $20 back to them, and to prepay the 
freight which is to be charged to them. This is done, the 
freight of $1.50 being paid to the P. R. R. Company. 

31. Received a bill from Soho Oil Company for gasoline and oil 
used during the month for auto truck, amount, $22.95. 
Received a 30-day 6 per cent note from P. & W. V. R. R. for 
bill of goods sold them on Oct. 5. 

Paid wages to salesmen, $450; warehousemen and truck 
driver, $530; office clerks, $300. 
5-29. From the following account balances, prepare a trial balance: 

Cash $ 9,000 

Inventory, Jan. 1, 19 7,500 

Mortgage Payable 45,000 

Sales 232,460 

Land 10,550 

Salaries 16,950 

Delivery Expense 3, 100 

Securities 10,000 

Building 43,000 

Sales Returns 4,450 

Interest Income /' 150 

Notes Receivable 15 ,000 

Store Supplies 3,400 

Prepaid Insurance 600 

J. C. Reed, Capital 40,200 

Dividends from Securities 300 

Furniture and Fixtures 2,250 

Accounts Payable 24,860 

Rent Expense 600 

Purchases 204,960 

Accounts Receivable 11 ,610 

5-30. The following are the account balances as shown in the general 

ledger of J. E. Amos, at the close of business, Dec. 31, 19 . Prepare a 

trial balance: 

Cash $ 1,956.22 

Notes Receivable 950. 00 

Accounts Receivable 21 ,720. 72 

Inventory, Jan. 1, 19 16,841.09 

Delivery Equipment 2,520. 00 

Furniture and Fixtures 1 ,897. 43 

Accounts Payable 4,591 . 19 

Notes Payable 1 ,672. 14 

J. E. Amos, Capital 31 ,431.03 



412 COST FINDING FOR ENGINEERS 

J. E. Amos, Withdrawals 659. 42 

Sales 173,468.92 

Sales Allowances 6,451 . 15 

Purchases 122,800. 66 

Purchase Allowances 2 , 999 . 19 

Freight In 1 ,476. 12 

Salaries 25,947. 19 

Traveling Expense 3,665. 83 

Rent 3,600.00 

Delivery Repairs and Supplies 1,614. 96 

Office Supplies 976. 25 

Advertising . '. 515 . 00 

Legal Fees 100. 00 

Interest Earned 25. 42 

Freight & Express Out 459. 27 

Interest Expense 36. 58 

6-31. From the following account balances, prepare a trial balance: 

Cash $ 7,250 * 

Notes Payable 1 ,500 

Purchases 27,461 

Purchase Returns and Allowances 411 

Wages 6,525 

Bank Discount 21 

Sales 40,350 

Donations 60 

Sales Discount 345 

Notes Receivable 1 ,400 

Office Equipment 3,020 

Commissions Earned 350 

Land 8,000 

Buildings 21 ,000 

Interest Received * 49 

Freight In 290 

Freight Out 165 

W. D. Harrison, Capital 33 ,000 

W. D. Harrison, Withdrawals 1 ,351 

Delivery Expense 1 , 189 

Accounts Payable 3 , 500 

Sales Returns and Allowances 350 

Repairs to Buildings 733 

6-32. Prepare a trial balance from the following ledger account 
balances: 

Cash $ 21 ,750 

Purchase Discount 1 ,642 

Salaries 27,956 

Automobiles 4,500 

H. H. Rothrock, Personal (withdrawals) 5,000 

Postage 1 ,023 

Purchase Returns and Allowances 469 



PROBLEMS 



413 



Telephone and Telegraph 

Freight In 

Sales 

Land 

Rental Income 

Advertising 

Inventory, Jan. 1, 19 , t 

Insurance 

Notes Payable 

Store and Office Equipment 

Purchases 

Sales Returns and Allowances 

Accounts Payable 

Traveling Expenses 

Freight Out 

Accounts Receivable 

H. H. Rothrock, Capital 

Building 

5-33. Make the postings from the following journal 
ledger accounts and prepare a trial balance: 

Cash Receipts Journal 



952 

2,340 

226,573 

30,500 

600 

8,640 

29,283 

1,290 

2,500 

5,000 

142,916 

1,207 

18,000 

6,029 

1,892 

49,666 

170,000 

79,840 

entries to the 

Rl 



Feb. 


1 
10 

28 


James Ellis, Capital 
Sales 

Cash 


V 


$20,431 


13 


$20,000 
431 


00 
13 





















Cash Disbursements Journal 



D2 



Feb. 


3 


Freight In 




$ 212 


21 








4 


Auto Truck 




2,420 


00 








8 


Advertising 




25 


52 








23 


Melrose Company 




1,447 


74 








28 


Wages 




420 


02 








28 


Cash 








$ 4,525 


49 

















Sales Journal 



S3 



Feb. 


15 
20 

28 


Me Co wan and Company 
Jones & Norris 
Sales 




$ 2,000 
1,926 


00 
96 


$ 3,926 


96 



















Purchase Journal 



P4 



Feb. 


2 

28 


Melrose Company 
Allis-Chambers Company 
Purchases 




$ 6,969 


02 


$ 1,497 
5,471 


79 
23 



















414 



COST FINDING FOR ENGINEERS 
General Journal 



J5 



Feb. 


1 


Cash 


V 


$20,000 


00 










Land 




5,000 


00 










Building 




6,000 


00 










James Ellis, Capital 








$31,000 


00 






To record the total original invest- 
















ment. 














23 


Melrose Company 




50 


05 










Purchase Allowances 








50 


05 






To show allowance granted by the 
















Melrose Company. 














26 


Office Expense 




40 


14 










Jenks & Company 








40 


14 






To record purchase of office supplies. 














28 


Notes Receivable 




2,000 


00 










McCowan and Company 








2,000 


00 






To show receipt of 6 per cent 60-day 
















note. 













6-34. Make the postings from the following journal entries to the 
ledger accounts and prepare a trial balance: 



Cash Receipts Journal CR 2 






D. A. Miner, Capital 
Morocco Mines, Inc. 
Cash 

Cash Disbui 


-sements Journal 




$ 7,940 


$ 5,000 
2,940 






CDS 






Office Supplies 
Wages 
Power 
Orlando Supply Co. 
Cash 

Purcha 


ses Journal 




$ 35 

380 
22 
5,940 


$ 6,377 






P4 






Orlando Supply Co. 
Norris & Hines 
Purchases 

Sales 


; Journal 




$ 9,500 


$ 6,000 
3,500 






S5 






Morocco Mines, Inc. 
J. E. Vaux 
Sales 






$ 3,000 
2,800 


$ 5,800 





PROBLEMS 



General Journal 



415 
J6 



Land 
Building 

D. A. Miner, Capital 
Sales Discount 

Morocco Mines, Inc. 
Norris & Hines 

Purchase Returns 
Orlando Supply Co. 

Purchase Discount 
Notes Receivable 

J. E. Vaux 



$ 5,000 
16,000 

60 

100 

60 

2,800 



$21,000 
60 
100 
60 
2,800 



Chapter VI 

6-36. Prepare a work sheet from the following trial balance: 

Inventory, Jan. 1, 19 $10,000 

Cash 5,000 

Accounts Receivable 15 ,085 

Delivery Truck 2,500 

Stores Fixtures 1 ,950 

Office Equipment 650 

Accounts Payable $ 5,000 

Mortgage Payable 1 ,035 

Notes Payable 4,900 

P. J. Wood, Capital 19,500 

Notes Receivable 500 

Delivery Truck Expense 35 

Sales Allowance 50 

Wages 237 

Royalties 2,800 

Power 150 

Insurance 50 

Purchase Returns 100 

Rent 200 

Freight Out 200 

Warehouse Expense 175 

Advertising 200 

Sales Discount 138 

Purchase Discount 35 

Purchases 2,700 

Sales 12,000 

Miscellaneous Sales 50 

$42,620 $42,620 

The inventory on Jan. 31, 19 was valued at $4,445. 
From the completed work sheet, prepare the following financial state- 
ments: 



416 COST FINDING FOR ENGINEERS 

a. Statement of income, profit and loss. 
6. Statement of ownership. 
c. Balance sheet. 

6-36. Prepare a work sheet, income, profit and loss statement, state- 
ment of ownership, and balance sheet from the following account balances : 

Cash $ 7,530 

Notes Receivable 1 , 000 

Accounts Receivable 16,756 

Inventory, Jan. 1, 19 31 ,212 

Store Equipment 3 ,650 

Office Furniture & Fixtures 1 ,820 

Delivery Equipment 4,900 

Notes Payable $ 800 

Accounts Payable 12 , 646 

L. C. Jones, Capital 56 ,400 

L. C. Jones, Drawing 4, 126 

Sales 183,020 

Sales Returns and Allowances 4,932 

Purchases 116,438 

Purchase Returns and Allowances 894 

Freight In 2,500 

Advertising 1 ,934 

Fuel, Water, and Power 2,502 

Rent 2,400 

Salesmen's Salaries 29,738 

Sales Office Expense 2 ,400 

Traveling Expense 6,216 

Postage 1 ,328 

Legal and Professional Expense. . 1 ,420 

Delivery Expense 4,900 

Telephone and Telegraph 1 ,716 

Commissions Earned 1 , 730 

Office Salaries 6,072 

$255,490 $255,490 

Inventory on June 30, 19 was valued at $33,484. 



PROBLEMS 417 

6-37. After completing a work sheet from the account balances listed 
below, prepare an income, profit and loss statement, a statement of 
ownership, and a balance sheet: 

Cash $ 27,500 

Purchase Discount $ 3,284 

Salaries 55 ,912 

Delivery Equipment 9 , 000 

M. A. Jones, Personal 10,000 

Legal and Professional Expense 2,046 

Purchase Returns and Allowances 938 

Subscriptions and Dues 1 , 904 

Uncollectible and Doubtful Accounts 4,680 

Sales 473,146 

Land 61 ,000 

Buildings 159,680 

Profit from Sale of Fixed Assets 1 ,200 

Advertising. ! 17,280 

Inventory, Jan. 1, 19 59,566 

J. Price, Personal 20,000 

Insurance 2 , 580 

Notes Payable 5 ,000 

Store and Office Equipment 10,000 

Purchases 320,832 

Sales Returns and Allowances 2,414 

Accounts Payable 36,000 

Traveling Expenses 12 , 058 

Freight Out 3 ,784 

Accounts Receivable 79,332 

M. A. Jones, Capital 170,000 

J. Price, Capital 170,000 

$859,568 $859,568 

The inventory on Dec. 31, 19 was valued at $35,512. 
According to the partnership agreement, profits and losses are divided 
equally. 



418 COST FINDING FOR ENGINEERS 

6-38. Prepare a work sheet from the following trial balance: 

Cash ......................................... $ 1,100 

Notes Receivable ............................... 550 

Accounts Receivable ............................ 18,000 

Inventory, July 1, 19 ......................... 6,000 

Furniture and Fixtures .......................... 3 ,000 

Accounts Payable .............................. $ 4,000 

J. A. Jones, Capital ............................ 23,937 

J. A. Jones, Personal ........................... 1 ,500 

Sales ......................................... 44,000 

Sales Returns & Allowances ..................... 425 

Rentals Received ............................... 2,200 

Commissions Earned ........................... 1 , 300 

Interest Earned on Notes Receivable ............. 33 

Profit from Sale of Fixed Assets .................. 25 

Purchases ..................................... 35,000 

Wages ........................................ 5,850 

Fuel .......................................... 90 

Water ........................................ 15 

Power ........................................ 150 

Rent. ........................................ 2,400 

Depreciation on Furniture and Fixtures ........... 65 

Advertising .................................... 700 

Office Supplies and Expense ..................... 450 

Prepaid Insurance .............................. 200 

$75,495 $75,495 

The closing inventory was valued at $3,100 on Dec. 31, 19 . 
From the completed work sheet, prepare the following statements: 
a. Statement of income, profit and loss. 
6. Statement of ownership. 
c. Balance sheet. 

6-39. From the following ledger accounts, prepare a work sheet at 
Jan. 31, 



Cash .................. $ 2,549. 40 Sales Discount ...... $ 200. 00 

Accounts Receivable ..... 13, 149. 96 Wages ............. 3,755. 00 

Automobile ............. 700 . 00 Accounts Payable. . . 5 , 000 . 00 

Mortgage Payable ....... 3 , 000 . 00 Auto Maintenance . . 467 . 80 

Sales .................. 21,067.46 Purchase Returns... 200.00 

J. M. Morgan, Capital ... 12 , 700 . 00 Notes Receivable ... 2 , 000 . 00 

J. M. Morgan, Drawings 100. 00 Rent .............. 1 ,320. 00 

Purchases .............. 14,500.00 Taxes ............. 180.00 

Prepaid Insurance ....... 1 95 . 30 Office Expense ...... 350 . 00 

Inventory Jan. 1, 19 ... 2 , 500 . 00 

The closing inventory was valued at $2,455. 



PROBLEMS 419 

Also prepare the following statements from the work sheet: 

1. Income, profit and loss statement. 

2. Statement of ownership. 

3. Balance sheet. 

6-40. Prepare a work sheet from the following ledger account balances 
taken from the ledger of A. M. Moffett, at July 31, 19 , at which date 
the inventory of merchandise was valued at $3,226.18. Also prepare a 
statement of income, profit and loss, a statement of ownership, and a 
balance sheet: 

Cash $ 580. 12 Sales Discount $ 7. 50 

Land 10,000. 00 Interest Earned .53 

Purchases 6, 109. 90 Salaries 325. 00 

Accounts Receivable 1,489.65 Inventory, July 1, 19 3,000.00 

Purchase Discount. . 56. 44 Notes Receivable 260. 00 

Office Equipment. . . 225. 00 Buildings 20,500. 00 

Notes Payable 600 . 00 Delivery Truck 600 . 00 

Sales 6,474.30 A. M. Moffett, Capital 35,500.00 

Accounts Payable. . . 465. 90 

Chapter VII 

7-41. Prepare the following from the trial balance and other supple- 
mentary data: 

1. Work sheet. 

2. Adjusting entries. 

3. Statement of income, profit and loss. 

4. Statement of ownership 

5. Statement of financial conditions. 



420 COST FINDING FOR ENGINEERS 

Trial Balance, Dec. 31, 19 

Cash $ 1 ,400 

Petty Cash 100 

Notes Receivable 2,000 

Accounts Receivable 8,000 

Inventory, Jan. 1, 19 7,500 

Equipment 12,000 

Accounts Payable $ 3 , 500 

M. A. Cook, Capital 24,769 

M. A. Cook, Personal 225 

Sales 90,800 

Miscellaneous Income 200 

Rentals Received 1 , 000 

Royalties Earned 1 ,000 

Purchases 72,500 

Warehouse Expense 1 , 000 

Delivery Expense 500 

Advertising 500 

Salesmen's Salaries and Commissions 9,700 

Prepaid Insurance 250 

Commissions Earned 235 

Profit from Sale of Capital Assets 96 

Rent 3,600 

Office Expense 2,325 

$121,600 $121,600 

Adjustments, Dec. 31, 19 : 

Inventory $6,750 

Accrued Warehouse Expense 69 

Insurance Expired 125 

Accrued Salesmen's Commissions 225 

Commissions Receivable 15 

Rentals Earned 950 

7-42. From the following ledger account balances and other data dis- 
closed on Dec. 31, 19 , prepare the following: 

1. Work sheet. 

2. Adjusting journal entries. 

3. Statement of income, profit and loss. 

4. Statement of ownership. 

5. Balance sheet. 



PROBLEMS 421 

Cash $ 4,500 

Inventory, Jan. 1, 19 7,750 

Mortgage Payable $ 22,500 

Sales 116,230 

Land 5,275 

Salaries 8,475 

Delivery Expense 1 ,400 

Warehouse Expense 150 

Stock of the Pittsburgh Coal Company 5,000 

Building 21 ,000 

Sales Returns 2 , 225 

Interest Income 75 

Notes Receivable 7 , 500 

Store Expense 1 ,700 

Prepaid Advertising 100 

Prepaid Fire Insurance 200 

N. R. Roland, Capital 24, 100 

Cash Dividends, Pittsburgh Coal Company 150 

Furniture and Fixtures 1 , 125 

Accounts Payable 12,430 

Rent 300 

Purchases 102,480 

Accounts Receivable 6 , 005 

Advance of Wages to Employees 300 

$175,485 $175,485 

Inventory, Dec. 31, 19 $ 10,236 

Unused gasoline charged to delivery expense 200 

Accrued interest on notes receivable 75 

Accrued interest on mortgage 1 ,350 

Accrued rent 25 

Salaries accrued 150 

Compensation insurance estimated 86 



422 COST 7 FINDING FOR ENGINEERS 

7-43. The trial balance as taken from the ledger of W. T. Porter is 
shown below: 

Cash $ 14,500 

Notes Payable $ 1 ,000 

Accounts Payable 9,000 

Purchases 54,922 

Purchase Returns and Allowances 822 

Wages 13,050 

Bank Discount 42 

Sales 80,700 

Donations 60 

Subscriptions and Dues 60 

Sales Discount 690 

Notes Receivable 2,800 

Office Equipment and Fixtures 3 ,000 

Accounts Receivable 3 ,040 

Commissions Earned 700 

Land 16,000 

Building 42,000 

Interest Received 98 

Freight In 300 

Fuel 280 

Freight Out 330 

W. T. Porter, Capital 80,000 

W. T. Porter, Withdrawals 2,702 

Delivery Expense 2 ,078 

Advertising 300 

Sales Returns and Allowances 700 

Repairs to Buildings 1 ,300 

Taxes 166 

Inventory, Jan. 1, 19 j 14,000 

$172,320 $172,320 

The adjustments to be taken into consideration at the close of the 
6-month period, June 30, 19 , are as follows: 

Inventory $9,585. 60 

Wages advanced to employees 215. 00 

Unearned commissions received. 13. 20 

Taxes accrued 344. 88 

Accrued interest on notes receivable 45 . 00 

Prepare: 

1. Worksheet. 

2. Adjusting journal entries. 

3. Statement of income, profit and loss. 

4. Statement of ownership. 

5. Balance sheet. 



PROBLEMS 423 

7-44. From the following trial balance and other adjustments at 
June 30, 19 , prepare: 
a. Work sheet. 
6. Adjusting journal entries. 

c. Income, profit and loss statement. 

d. Statement of ownership. 

e. Balance sheet. 

Cash $ 6,820.30 

Notes Receivable 6,000. 00 

Accounts Receivable 10,007. 34 

Inventory, Jan. 1, 19 15,001.32 

Store Furniture and Fixtures 7,500.00 

Office Equipment 2 ,500. 00 

Delivery Equipment 5,000. 00 

Notes Payable $ 1 $200. 00 

Trade Acceptances Payable 1 ,300.00 

Accounts Payable 5,197.26 

Notes Receivable Discounted 4,500. 00 

Purchases 62,501 . 50 

Sales 84,950. 16 

Commissions 1 ,250. 00 

Miscellaneous Income 1 ,250. 30 

Rentals Received 572. 00 

Interest Income 51 . 50 

Repairs 118. 00 

Taxes 121. 10 

Wages 12,501. 10 

Rent 4,100.00 

Advertising 7,591 . 06 

Stationery and Office Expenses 504. 00 

Light and Power 505.32 

Interest and Discount 480. 36 

Insurance 500. 00 

J. M. Bailey, Personal 900. 00 

J. M. Bailey, Capital 42,380.18 

$142,651.40 $142,651.40 

Inventory, June 30, 19 $15, 548. 94 

Rent paid in advance 918. 00 

Accrued wages 334. 54 

Miscellaneous income applicable to the period 

subsequent to June 30, 19 57. 20 

Interest accrued on notes receivable 9. 00 

Unexpired insurance 250. 00 

7-46. From the following trial balance and adjustments, you are to 
prepare: 

a. Work sheet. 

6. Adjusting journal entries. 



424 COST FINDING FOR ENGINEERS 

c. Statement of income, profit and loss. 

d. Statement of capital. 

e. Balance sheet. 

Cash $ 8,000 

Notes Receivable *.. 1 ,000 

Accounts Receivable 25 ,000 

Inventory, Jan. 1, 19 24,000 

Land 10,000 

Building 15,000 

Furniture and Fixtures 5 ,000 

Accounts Payable $ 10,000 

Reserve for Depreciation Building 1 ,200 

Reserve for Depreciation Furniture and Fixtures 600 

Reserve for Doubtful Accounts 100 

J. A. Paul, Capital 80,280 

J. A. Paul, Personal 2,000 

Purchases 123,200 

Advertising 1 ,200 

Salaries (salesmen) 11 ,500 

Insurance 275 

Legal and Professional Expense 325 

Taxes 235 

Rent 3,300 

Office Clerks Salaries 6,545 

Prepaid Rentals Received 600 

Sales 140,000 

$234,680 $234,680 

Depreciation on building, 3 per cent of cost. 
Depreciation on furniture and fixtures, 10 per cent 

of cost. 

Prepaid advertising $ 500 

Advanced salaries to salesmen 400 

Interest accrued on notes receivable 10 

Prepaid rent 100 

Rentals earned 450 

Office clerks salaries accrued 520 

Inventory, Dec. 31, 19 30,000 

Charge off 1 per cent of sales as the estimated loss 

from doubtful accounts for the year. 
Taxes accrued ' 140 

7-46. The following account balances are taken from the trial balance 
of a company on Dec. 31, 19 : 

Wages $6,525 

Interest Earned $ 60 

Prepaid Bank Discount 50 

Prepaid Subscriptions Received 10,948 



PROBLEMS 425 

The bookkeeper of the company computed a net profit of $6,142 for the 
year ended Dec. 31, 19 , but did not consider the following adjustments: 

Accrued wages $ 425 

Accrued interest earned 22 

Bank discount 25 

Subscriptions income 5,474 

a. What should have been the net profit? 

b. What would be the entry or entries to correct the error? 

7-47. At the close of the fiscal year, the following amounts appeared in 
the trial balance of the Hanover Manufacturing Company: 

Salaries $16,950 

Store Supplies 3,400 

Interest Income 238 

Interest on Mortgage Payable 1 ,350 

Prepaid Insurance 600 

The following adjustments are required to reflect accurate operating 
results: 

Salaries accrued $ 450 

Store supplies inventory 500 

Interest income accrued 37 

Interest on mortgage accrued 1 ,350 

Insurance expense 300 

Estimated property taxes 1 ,400 

o. Prepare the adjusting entries. 

6. List the name and amount of each item that will appear in the 
statement of income, profit and loss. 

c. What items and amounts will appear in the balance sheet, and 
under what headings? 

Chapter VIII 

8-48. On Jan. 1, 19 , a company purchased six automobile trucks, 
paying $4,200 for each, and one year later purchased four additional 
trucks at a cost of $2,400. The trucks were depreciated by the straight- 
line method on the basis of an estimated useful life of six years. On 
Dec. 31, 19 , three years after the purchase of the trucks, the first six 
trucks were traded in for six new cars, costing $1,800 each. An allow- 
ance of $450 was made on each of the old trucks. The accumulated 
depreciation for three years was credited to a reserve account. 

Prepare journal entries necessary to record the transactions at Dec. 31, 
19 , when the trade-in was made. 

8-49. An automobile truck originally costing $825 was destroyed by 
fire. It was replaced by one costing $1,150, for which cash was paid, and 
there was no insurance on the old truck. How should the transaction be 
recorded: 



426 COST FINDING FOR ENGINEERS 

a. When no provision for depreciation had been made? 

6. When the depreciation charges were offset by credits to a Reserve 
for Depreciation on Auto Truck account, the amount in the reserve to 
date amounting to $618.75? 

8-60. A machine was purchased four years ago at a cost of $40,000. 
At the time of purchase it was estimated to have a useful life of ten 
years and was depreciated in accordance by the straight-line method. 
At the end of the fourth year, it was found that the above machine would 
have to be scrapped and replaced by a more modern type of equipment 
in order to keep pace with competitors. The new machine cost $80,000 
installed. What disposition would be made of the undepreciated cost of 
the first machine when it was scrapped, considering the scrap value to 
be $500. 

8-61. The Ronoke Manufacturing Company purchased ten like 
machines at a cost of $2,000 each. Each machine was estimated to have 
a life of ten years and a scrap value of $50. Show the entry to record 
depreciation at end of first year, using the straight-line method. 

At the end of the sixth year after purchase, five of the machines were 
sold for $250 each, and were replaced by five new ones costing $1,500 
each. 

Prepare the entries for the disposal of the old machines and purchase 
of the new machines. 

8-62. A machine was constructed and charged to a Machinery account 
nine years ago together with other machines made up at the same time. 
A separate cost of each unit of machinery was not kept. According to 
regular practice still in force, a credit was set up in a Reserve account, 
for depreciation of machinery at the rate of 10 per cent per annum on 
the total balance in the Machinery account. At the end of nine years, 
this machine was sold for $2,000, and you can secure no more accurate 
information as to its cost than the engineer's opinion that the item sold 
must have cost somewhere between $20,000 and $22,000 originally. 
A new machine was purchased for $15,000, replacing the old one sold. 
What entries should appear on the books to record the sale of the old 
machine and the purchase of the new machine? 

8-63. The Royal Manufacturing Company purchased ten marking 
machines at a cost of $3,500 each. The engineers estimated that each 
machine could be used 20,000 working hours. The production 
record at the end of the first year was as follows: 

No. of 

Machine Hours 

1 2,000 

2 ; 2,200 

3 2,400 

4 2,450 

5 2,650 

6 2,700 

7 1,900 

8 1,800 

9 1,700 

10 2,100 



PROBLEMS 



427 



Compute the depreciation charge for the first year, and prepare the 
adjusting entry for the depreciation. 

8-64. Make the computations necessary to fill in the three blank 
columns, and also prepare the adjusting entry for the annual depreciation 
charge on Dec. 31, 1935: 









Number 






Accumulated 


depreciation 






Esti- 


of years 




1935 






Assets 


Cost 


mated 
life in 


pos- 
sessed 


Scrap 
value 


Depre- 
ciation 










years 


Dec. 31, 




charge 


Dec. 31, 1934 


Dec. 31, 1935 








1934 










Machinery. . . . 


$12,000 


10 


6 


$500 








Delivery 
















Equipment. . 


2,000 


4 


3M 


250 








Buildings 


50 , 000 


25 


7 


none 








Boiler 


13,000 


12> 


5 


300 

























8-65. The U. S. & S. Company purchased five new auto trucks on 
Jan. 1, 1931, paying cash of $2,000 for each truck. The policy of this 
company is to charge off 25 per cent depreciation per annum on auto- 
mobiles. (For problem purposes consider that the adjusting entries for 
depreciation are made annually on Dec. 31, except when a unit is dis- 
posed of during the year.) 

On Jan. 1, 1933, truck No. 1 was sold for $1,100 cash. 

On July 1, 1933, truck No. 2 was traded in on a new truck, No. 6, cost- 
ing $2,200, an allowance of $900 being given on the old truck. 

On Jan. 1, 1934, truck No. 3 was traded in on a new truck, No. 7, 
costing $1,800, an allowance of $300 being given on the old truck. 

On July 1, 1934, truck No. 4 was traded in on a new truck, No. 8, 
costing $2,500, an allowance of $250 being given on the old tfuck. 

Prepare all of the journal entries for the above transactions, and show 
all of the postings made therefrom to the ledger accounts up to and 
including Dec. 31, 1934. 

8-56. On July 1, 1920, the Square Deal Company purchased four 
drying machines at a cost of $2,500 each. The freight paid on the 
machines amounted to $200, and the cost of erection was $400. The 
estimated useful life placed on the machines was ten years, each machine 
having a scrap value of $100. The company closed its books yearly at 
Dec. 31 and depreciated its equipment upon the straight-line basis. 

On Jan. 1, 1925, one of the machines was sold for $1,350. 

On Jan. 1, 1925, another machine was sold for $950. 

On July 1, 1930, another machine was traded in on a new machine 
having a purchase price of $2,000. An allowance of $100 was received 
on the old machine. 

Prepare: 

a. Journal entries to record the above transactions. 

6. Post all entries to the Machinery account and the Reserve account, 
showing the balances at July 1, 1930. 



428 



COST FINDING FOR ENGINEERS 



8-57. The Dobson Manufacturing Company has the following fixed 
assets in its plant. Compute the composite Life of the plant from the 
information given: 



Assets 


Cost 


Estimated 
life years 


Scrap 
value 


Machinery 


$100,000 


8 


$2,000 


Belting 


3,425 


3 


25 


Buildings 


78,480 


20 


500 


Boilers and Furnaces 


56,370 


5 


750 











8-58. A mineral deposit was bought in 1929 for $300,000. The esti- 
mated recoverable tons were 1,000,000. Between 1929 and 1931 inclu- 
sive, 330,000 tons were mined. On Jan. 1, 1932, 1, 130,000 tons additional 
were discovered. The discovery value of the newly found mineral 
deposits Jan. 1, 1932 was $450,000. In 1932, 1933, and 1934, there were 
mined 160,000, 164,000, and 168,000 tons respectively. What depletion 
charge would you make in the years 1932, 1933, and 1934 based on cost 
and also based on discovery value? Prepare the entry for the depletion 
charge. 

8-69. The McKeesport Coal Company purchased a tract of land for 
$200,000 which was estimated to produce 100,000 tons of coal. During 
the first year of operation, 50,000 tons of coal were excavated. 

What entry would you make for the depletion? 

8-60. The Sun Oil Company purchased oil lands in Jan., 1934, for 
$4,500,000. The recoverable oil was then estimated at 900,000 barrels. 
The income from the property in 1934 was $1,000,000. The oil pro- 
duced in 1934 amounted to 150,000 barrels. Prepare all of the entries 
necessary to record these transactions. 

8-61. The Vermont Stone Company, a corporation organized to issue 
1,250 shares each of common and preferred stock with a par value of 
$100, disposed of the entire authorized issue as follows: 625 shares of each 
subscribed for at par and paid in cash,, and the balance issued for the 
quarry land paid in full. $30,000 was paid for new equipment pur- 
chased. It is estimated that the quarry will produce 125,000 tons. At 
the end of the first fiscal period, June 30, 19 , the books revealed the 
following facts: 

Sales for cash, 8,750 tons $35,000. 00 

Excavation labor 3,000. 00 

Miscellaneous excavation expense 3,250.00 

Depreciation on equipment 3,000. 00 

Marketing expenses 1 ,750. 00 

General administrative expense 1 ,900. 00 



All expenses were paid by cash. There was no inventory at June 30, 



PROBLEMS 429 

a. What was the amount of the depletion charge per ton? 

b. Prepare entries for the above transactions. 

c. If an 8 per cent dividend had been declared and paid on the pre- 
ferred stock, what would have been the entry? 

d. Prepare a profit and loss statement and a balance sheet after the 
dividend was declared. 

8-62. From the following information at Dec. 31, 19 , prepare: 

1. Work sheet. 

2. Adjusting entries. 

3. Statement of income, profit and loss. 

4. Statement of surplus. 

5. Balance sheet. 

KING MERCANTILE COMPANY 

TRIAL BALANCE 

Dec. 31, 19 

Cash $ 6,708 

Inventory, Jan. 1, 19 16,920 

Sales $180,840 

Land 16,000 

Buildings 12,500 

Machinery 12,500 

Salaries 17 ,780 

Delivery Expense 1 , 590 

Investment Midland Chemical Bonds 15,870 

Interest Income on Bonds 640 

Sales Returns 1 , 160 

Interest Income 240 

Notes Receivable 7,000 

Reserve for Depreciation on Buildings 3,000 

Reserve for Depreciation on -Machinery 3,000 

Prepaid Insurance 1 ,800 

Capital Stock 60,000 

Surplus 25,480 

Furniture and Fixtures 8,476 

Accounts Payable 6,000 

Warehouse Rent 350 

Repairs to Warehouse 370 

Purchases 145 , 176 

Accounts Receivable 11 ,000 

Delivery Equipment 5 ,000 

Reserve for Depreciation on Furniture and Fix- 
tures 1,000 

$280,200 $280,200 

The adjustments to be considered on Dec. 31, 19 , were as follows: 

Inventory. $19,344. 02 

Interest on Bonds Accrued 320, 00 

Insurance Unexpired 1 ,200. 00 



430 COST FINDING FOR ENGINEERS 

Depreciation on Building, 23^ per cent of cost 
Depreciation on Machinery, 5 per cent of cost 
Depreciation on Furniture and Fixtures, 12j^ per cent of 

cost. 
Depreciation on Delivery Equipment, 25 per cent of cost. 

Chapter IX 

9-63. On Apr. 30, 1935, the Peerless Products Company estimated 
their power cost for the month of April to be $1,470 for the purpose of 
preparing the work sheet and monthly statements. On May 12, 1935, 
the company received a bill from the West Penn Power Company for 
$1,462 for the power consumed in the preceding month of April. 

Prepare the entries to record the above transactions. 

9-64. a. The Apex Corporation suffered heavy inventory losses from 
floods in 1929 and in 1932. The board of directors, at a meeting held 
on Jan. 15, 1933, decided to set up a reserve for losses from this source in 
an amount of $25,000, which was done. The reserve was to remain at 
this figure until further action by the board of directors. What would 
the entry be to set up the reserve? 

b. On Mar. 18, 1936, another flood caused a damage of $13,150 to the 
inventory stored in the warehouse. What would the necessary entry or 
entries be to be made on Mar. 18, 1936, assuming that the inventory 
items damaged by the flood were replaced at a cost of $13,510? 

9-65. The following adjusting entry was made at the end of each 
month during the year 1935: 

Inventory Shortage $75 

Reserve for Inventory Shortage $75 

To charge operations with esti- 
mated inventory shrinkage for the 
month of , 1935. 

What would be the entry when the physical inventory was taken on 
Dec. 31, 1935, and the shortage was ascertained to be $842.45? 

9-66. The Better Products Company created a reserve for improve- 
ments to buildings to the amount of $14,500 on Dec. 31, 1935. The 
cost of the improvements actually made and completed on June 17, 
1936, amounted to $13,500. Prepare the journal entries to record both 
transactions. 

9-67. In the business of the Rapid Delivery Service Company, the 
estimated amount of ordinary repairs for the delivery equipment was set 
at $3,000 for the year 1935. Monthly adjusting entries were prepared 
to provide for the repairs upon an equal monthly basis. The actual 
amount of repairs made to the equipment for the twelve month period 
ended Dec. 31, 1935 cost $3,250.40. Record the journal entries for these 
transactions.^ 

96-8. The board of directors of the McKeesport Tinplate Company 
passed a resolution on Nov. 15, 1933 to increase the capacity of their 
plant by building an addition to the plant building estimated to cost 
$150,000. The resolution specified that the erection should be financed 
from undistributed profits. Actual work on the building began Dec. 1, 
1933. At the end of the month an expenditure of $15,000 had been 



PROBLEMS 



431 



made for foundation work. During the following year the job was com- 
pleted at a total cost of $140,000. Show all entries necessary during the 
first year, as well as the manner in which the items would appear in the 
balance sheet at the end of the first year. Make the required entries 
during the year in which the building was completed. 

9-69. A building was constructed and completed Jan. 1, 1920, at a 
cost of $100,000. It was depreciated at a rate of 2 per cent per annum. 
An appraisal was made on Dec. 31, 1931, which disclosed that it had a 
value of $85,000. The management wanted the difference between 
appraisal value and the book value to be shown in the accounts. 

a. Show the necessary entry or entries to reflect the appraisal on the 
books of account, assuming that the depreciation rate previously used 
was the accurate one to use. 

b. What entries would be made if the building sold for $80,000 on 
Dec. 31, 1932? 

9-70. The Sterling Steel Corporation makes use of 20 open-hearth 
furnaces in their manufacturing plant. The furnaces cost $25,000 each 
when new, and they are all 50 per cent depreciated. The furnaces 
require relining, on the average, every nine months, and the average 
cost for relining during the last five years has been $2,430 for each furnace. 

Prepare the adjusting entry on Jan. 31, 19- , to provide for the 
monthly cost of relining, assuming that all furnaces are in use. Also 
prepare the entry on Feb. 27, 19 , of the same year, when furnace 
number 18 had been completely relined at a cost of $2,500. 

9-71. The Perfection Petroleum Products Corporation carried their 
own insurance risk because of the high premium rate due to the extra- 
ordinary fire hazard in their refinery. This policy went into effect on 
Jan. 1, 1936, when they created a reserve to the amount of $300,000, 
which was one-fifth of the estimated total replacement cost of their 
property. In order to increase their reserve to a point that would be a 
more adequate coverage in event of fire, it was decided to place an addi- 
tional amount in the reserve to the extent of ^0 per cent pier annum of 
the replacement cost on a monthly basis until the reserve reached 80 
per cent of the replacement value. 

1. What entry would be made on Jan. 1, 1936? 

2. What adjusting entry would be made at the end of each month that 
would affect the insurance reserve? 

On Aug. 17, 1936, a fire occurred in one of the buildings of the plant 
with losses as follows: 





Cost value 
of asset 


Accumulated 
depreciation 
in reserve 


Fire loss 
incurred 


Building 


$30,000 


$10,000 


Total loss 


Equipment 


40,000 


20,000 


Total loss 











The building was replaced at a cost of $35,000, and the purchase of new 
equipment cost $43,000. 



432 COST FINDING FOR ENGINEERS 

3. What entry or entries should be made to account for the loss? 

4. What entry or entries should be made to account for the replace- 
ment of the assets? 

9-72. The following adjusting entry was made on Dec. 31, 1934: 

Bad Debts $1,864.28 

Reserve for Bad Debts SI , 864 . 28 

To charge operations for the year ended Dec. 31, 
1934 with 1 per cent of net sales for estimated 
uncollectible accounts. 

What would be the entry on Dec. 31, 1935 when it was definitely known 
that customers* accounts arising from 1934 sales totaling $1,728.64 are 
uncollectible? 

9-73. On Dec. 31, 1933, the following adjusting entry was made on 
the books of the Square Deal Company: 

Bad Debts $1,701.54 

Reserve for Doubtful Accounts $1 , 701 . 54 

To provide for estimated loss on customers' 
accounts applicable to the year 1933, being 
2 per cent of the outstanding accounts receiv- 
able on Dec. 31, 1933. 

During 1934, customers' accounts amounting to $1,500.54, arising from 
sales made in 1933, proved to be uncollectible. Also customers' accounts 
amounting to $347.48 arising from sales made in 1934, were found to be 
uncollectible before Dec. 31, 1934. Prepare all entries necessary for 
transactions mentioned above during 1934. What balance should 
appear in the account, Reserve for Doubtful Accounts, prior to making 
the adjusting entry for doubtful accounts on Dec. 31, 1934? What dis- 
position should be made of this balance? 

9-74. On Dec. 31, 1933, when the books of the Oakland Packing Com- 
pany were closed, a reserve for doubtful accounts was created for $5,000, 
based on a percentage of outstanding accounts receivable. Included in 
the accounts receivable on Dec. 31, 1933 was an account with E. M. 
Morris showing a balance of $1,050 for goods sold him Dec. 15, 
1933. 

On Jan. 15, 1934, ^merchandise to the value of $525 was also sold to 
Mr. Morris. Morris became bankrupt and in the settlement of his 
business only fifty cents on the dollar was paid to his creditors Sept. 5, 
1934. Make the entry or entries on the books of the Packing Company 
at the time of the final and only payment on Sept. 5, 1934. 

9-75. The Mall Corporation decided to issue $50,000 worth of 6 per 
cent 5-year bonds on Jan. 1, 1933, the interest being payable semiannually 
on the first of July and January. 

The bonds provided for a sinking fund and a sinking fund reserve to be 
created, in order to insure sufficient funds at maturity to liquidate the 
bonds. 

It was estimated that the sinking fund would provide a 6 per cent 
return on the cash invested, and that the interest would be compounded 
annually. The periodic sinking fund contribution amounted to $8,869.82. 

All bonds were issued at 100 on Jan, 1, 1933, and the bondholders were 
paid on Jan. 1, 1938. 



PROBLEMS 433 

Prepare the following: 

1. A table to show the periodic sinking fund contribution, the annual 
interest earned, the periodic accumulation in the fund, and the cumula- 
tive amount in the fund for the five-year period. 

2. Prepare the entries to show: 

a. The authorization for the bonds. 

b. The issue of the bonds. 

c. The bond interest payments on July 1, 1933. 

d. The creation of the sinking fund reserve on Jan. 1, 1934. 

e. The interest earned on Jan. 1, 1934. 

/. The contribution to the sinking fund on Jan. 1, 1934, and on 

Jan. 1, 1935. 
g. The periodic adjustment to the sinking fund reserve on Jan. 1, 

1935. 
h. The necessary entries on Jan. 1, 1938 to close all of the accounts 

affected by the bonds maturing, assuming that the sinking fund 

contributions were made in conformity with the agreement to 

the bondholders. 
9-76. From the following information prepare: 

1. Work sheet. 

2. Statement of income, profit and loss. 

3. Statement of ownership. 

4. Balance sheet. 

Trial Balance, Dec. 31, 19 

Cash $ 4,750.00 

Inventory, Jan. 1, 19 3 ,750. 00 

Mortgage Payable $ 22,500. 00 

Sales 116,230.00 

Land 5,275.00 

Building 23,500.00 

Salaries 8,475. 00 

Delivery Expense 1 ,400. 00 

Warehouse Expense 150. 00 

Stock of Pittsburgh Coal Company 5 ,000. 00 

Sales Returns 2,225. 00 

Interest Income 75. 00 

Notes Receivable 7,500. 00 

Stores Supplies 1 ,700. 00 

Prepaid Insurance 200. 00 

Advertising 1 , 100. 00 

Cash Dividends, Pittsburgh Coal Company 150. 00 

Furniture and Fixtures 1 , 125. 00 

Accounts Payable 12,430. 00 

Warehouse Rent 300. 00 

Purchases 100,480. 00 

Accounts Receivable 5 ,505. 00 

Advance Wage Payments 50. 00 

J. A. Williams, Capital 21,100.00 

$172,485.00 $172,485.00 



434 COAST FINDING FOR ENGINEERS 

The adjustments for consideration at Dec. 31, 19 were as follows: 

Inventory $4,236. 00 

Insurance unexpired 100 . 00 

Accrued interest on notes receivable 75. 00 

Accrued interest on mortgage 1 ,350. 00 

Accrued salaries 125. 00 

Compensation insurance estimated 86. 00 

Depreciation on furniture and fixtures, 10 per cent per annum based on 
cost. 

Doubtful accounts estimated to be 2 per cent of outstanding accounts 
receivable. 

Chapter X 

10-77. From the following figures, prepare a condensed comparative 
statement of income, profit and loss with percentage analyses: 

! NEW YORK MANUFACTURING CORPORATION 

CONDENSED COMPARATIVE STATEMENT OF INCOME, PROFIT AND Loss 

For Years Ended Dec. 31, 1936 and Dec. 31, 1935 
; Dec. 81, 1936 Dec. 31, 1935 

Sales $510, 000 ~ $487,000 

Net Sales 500,000 480,000 

Cost of Goods Sold 350,000 350,400 

Marketing and Administrative Expenses 130,000 124,800 

Total Incidental Income 5,000 4,000 

Total Incidental Expenses 15 , 000 12 , 000 

1. Compute the inventory turnover for both years, using the following 
figures : 

Inventory, Jan. 1, 1935 $88,000 

Inventory, Dec. 31, 1935 78,888 

Inventory, Dec. 31, 1936 65,400 

2. Compute the return earned on the invested capital for both years, 
using the following figures: 

Capital stock outstanding at the end of both years, $200,000. 
Surplus before considering.net profit or loss at the end of the year: 

Dec. 31, 1935 30,000 

Dec. 31, 1936 14,400 



PROBLEMS 435 

10-78. The following balance sheet Was prepared from the books of the 
Small Tools Corporation on Dec. 31, 19 : 

SMALL TOOLS CORPORATION 

BALANCE SHEET 

Dec. 31, 19 

Assets Liabilities and Ownership 

Current Assets: Current Liabilities: 

Cash $12,500 Notes Payable $ 6,000 

Notes Receivable 3,200 Accounts Payable 48,000 

Accounts Receivable $90,000 Reserve for Federal Income 
Less: Reserve for Tax 9,000 

Doubtful Ac- Total Current Liabilities $ 62 ,000 

counts 900 89,100 

Inventories: 

Raw Materials... $21,650 

Work in Process. . 8,952 

Finished Goods. . . 6,887 37,489 Long Term Liabilities: 

Total Current Assets $142,289 Bonds Payable 60,000 

Total Liabilities $122,000 

Fixed Assets: Capital Stock $200,000 

Land $5,000 Surplus 14.128 

Building $25,000 Total Ownership 214,128 

Less: Reserve for 
Depreciation... 333 24,667 

Machinery $65,500 

Less: Reserve for 
Depreciation... 4,004 61,406 

Office Equipment. .. $ 2,800 
Less: Reserve for 
Depreciation. . . 140 2,660 

Total Fixed Assets 93,733 

Jntangibk Assets: 

Goodwill 100,000 

Prepaid Assets: 

Prepaid Insurance 106 

$336,128 $336,128 



1. What entry would be made if a 6 per cent dividend was declared on 
Jan. 1, 19 , the day after the balance sheet was prepared, payable to the 
stockholders of record as of Jan. 31? 

2. What entry would be made if an appraisal disclosed that the land 
value was $15,000? 

3. What entry would be made if it was desired to write off 10 per cent 
of the goodwill? 

4. Do you consider the corporation to be in good financial condition? 
Give specific reason or reasons for your answer. 

5. Is it always possible to draw an accurate conclusion as to the finan- 
cial condition of a business concern by reviewing only its balance sheet, 
as for example the one given in this problem? State definite reasons for 
your answer. 

10-79. After a careful study of the comparative statement on page 436, 
enumerate at least five reasons for the increase in profits over the six 
year period. 



436 



COST FINDING FOR ENGINEERS 



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PROBLEMS ,437 

10-80. Prepare the following measurements, ratios, and turnovers 
from the operating and financial statements of the Carnegie Products 
Corporation for 1935: 

1. The ratio of costs and expenses to net sales. 

2. The inventory turnover. 

3. The working capital and working capital ratio. 

4. The turnover of net working capital. 

5. The turnover on fixed property investment. 

6. The return earned on common capital stock. 



438 COST FINDING FOR ENGINEERS 

THE CARNEGIE PRODUCTS CORPORATION 
COMPARATIVE BALANCE SHEET 
Dec. 31, 1935 and Dec. 31, 1934 

Dec. 31, 1935 Dec. 31, 1934 

Assets 
Current Assets: 

Cash $ 240,813 $ 223,543 

U. S. Government Securities 34 , 503 59 , 977 

Other Marketable Securities 50 , 91 1 13 , 137 

Notes Receivable, less reserves 72 , 061 100 , 000 

Accounts Receivable, less reserves 300 , 000 335 , 671 

Inventories 452,370 627, 123 

Accruals Receivable 25,000 30,000 

Total $1,175,658 $1,389,451 

Investments: 

In Subsidiary Companies $ 576,824 $ 450,000 

Fixed Assets: 

Land, Buildings, and Equipment $1 , 199 , 894 $1 , 227 , 785 

Less: Depreciation Reserves 472,172 494,344 

$ 727,722 $ 733,441 

Patents 100 100 

Total $ 727,822 $ 733,541 

Deferred Charges: 

Prepaid Insurance $ 10,942 $ 14,793 

Total Assets $2,491,246 $2,587,785 

Liabilities and Net Worth 
Current Liabilities: 

Accounts Payable $ 62,169 $ 99,152 

Accruals Payable 39,127 62,295 

Dividends Payable 109,564 109,564 

Advance Billings on Contracts 32 , 317 40 , 000 

Subscriptions on Capital Stock 75,584 109,030 

Total $ 318,761 $ 420,041 

Long Term Liabilities: 

Bonds Payable (6 per cent 10-year bonds 

issued Jan. 1, 1934) $ 227,600 $ 227,600 

Net Worth: 

Capital Stock 8 per cent Cumulative Pre- 
ferred, $100 par value $ 399 ,800 $ 399 ,800 

Capital Stock Common, $100 par value 1 , 293 , 000 1 , 293 , 000 

Surplus, Free 102,085 97,344 

Reserve for Contingencies 150,000 150,000 

$1,944,885 $1,940,144 

$2,491,246 $2,587,785 



PROBLEMS 439 

THE CARNEGIE PRODUCTS CORPORATION 

CONDENSED STATEMENT OF PROFIT AND Loss 

Jan. 1, 1935 to Dec. 31, 1935 

Gross Sales $1 ,852,835 

Less: Sales Returns and Allowances 50,000 

Net Sales $1,802,835 

Cost of Goods Sold: 

Inventories, Jan. 1, 1935 $ 627 , 123 

Cost of Production 1,265,433 

Cost of Goods Available for Sale $1 ,892,556 

Inventories, Dec. 31, 1935 452,370 

Cost of Goods Sold $1,440,186 

Gross Profit $ 362,649 

Marketing and Administrative Expenses. . . . 270,425 

Net Operating Profit $ 92,224 

Incidental Incomes s, . 35 ,737 

$ 127,961 

Incidental Expenses 13 ,656 

Net Profit to Surplus $ 114,305 



THE CARNEGIE PRODUCTS CORPORATION 

STATEMENT OF SURPLUS 
Dec, 31, 1934 and Dec. 31, 1935 

Surplus, Dec. 31, 1934 $ 97,344 

Add: Net Profit 114,305 

$211,649 

Deduct: Dividends Payable 109,564 

Surplus: Dec. 31, 1935 $102,085 



10-81. From the following statements of the Portland Products Com- 
pany submit a report showing the following: 

1. The working capital and ratio. 

2. The investment of total capital to current assets, fixed assets, and 
deferred charges. 

3. The turnover of the inventories of raw materials, work in process 
and finished goods. 

4. The return earned on the capital stock. 

5. The fixed property investment turnover. 

6. The gross profit percentage. 

7. The net profit percentage. 

8. The turnover of accounts receivable, assuming that sales are made 
on a 30-day credit basis. 



440 COST FINDING FOR ENGINEERS 

EXHIBIT "A" 

PORTLAND PRODUCTS COMPANY 

STATEMENT OF COST OF PRODUCTION 

Jan, 1, 19 to Dec. 31, 19 

Inventory, Raw Materials, Jan. 1, 19 $ 12,500.00 

Purchases, Raw Materials $96 , 850. 00 

Freight In 1,398.00 98,248.00 

Cost of Raw Materials Available for Use. . $110,748. 00 

Inventory, Raw Materials, Dec. 31, 19 14,750.00 

Cost of Raw Materials Used $ 95,998.00 

Direct Labor 39,565. 00 

Overhead Expenses: 

Indirect Labor $ 7, 180. 00 

Heat, Light, and Power 3,456. 00 

Factory Expense and Supplies 1 ,510.00 

Insurance on Plant and Equipment 576 . 50 

Depreciation on Building 1 ,000. 00 

Depreciation on Machinery and Small 

Tools 3,190.00 16,912.50 

$152,475.50 

Inventory, Work in Process, Jan. 1, 19 . . . . 5,750. 00 

$158,225.50 

Inventory, Work in Process, Dec. 31, 19 . . 5,100.00 

Cost of Production, Jan. 1, 19 to Dec. 31, 

19 $153,125.50 



PROBLEMS 441 

EXHIBIT "B" 

PORTLAND PRODUCTS COMPANY 

STATEMENT or INCOME, PROFIT AND Loss 

Jan. 1, 19 to Dec. 31, 19 

Sales $175,000.00 

Less: Sales Returns and Allowances 4,672. 00 

Net Sales $170,328.00 

Cost of Sales: 

Inventory, Finished Goods, Jan. 1, 19 . . $ 22,870.00 

Cost of Production 153,125.50 

Cost of Goods Available for Sale $175,995.50 

Inventory, Finished Goods, Dec. 31, 19 27,892^.00 

Cost of Sales 148,103.50 

Gross Profit $ 22,224.50 

Marketing Expenses: 

Advertising $ 2,055. 00 

Insurance on Finished Goods 166. 00 

Salesmen's Salaries 6,000, 00 

Salesmen's Traveling Expenses 1,800.00 10,021.00 

Net Profit before considering Adminis- 
trative Expenses $ 12,203. 50 

Administrative Expenses: 

Office Salaries $ 3 ,250. 00 

Stationery and Office Supplies 315. 00 

Postage 962. 00 

Office Expense 417. 00 

Office Rent 600. 00 

Officers' Salaries 8,000. 00 

Depreciation on Furniture and Fixtures. . . 162.50 13,706.50 

Net Operating Loss $ 1 ,503. 00 

Incidental Expenses: 

Sales Discount . $ 1,183.00 

Doubtful Accounts 1 , 108. 00 

Interest on Notes Payable 124. 78 

Interest on Mortgage Payable 600.00 

Interest on Bonds Payable 750.00 3,765.78 

$ 5,268.78 
Incidental Incomes: 

Purchase Discount $ 1 ,055. 00 

Interest Earned 196.00 1,251.00 

Net Loss to Surplus $ 4,017.78 



442 COST FINDING FOR ENGINEERS 

EXHIBIT "C" 
PORTLAND PRODUCTS COMPANY 

- STATEMENT OF SURPLUS 
Jan. 1, 19 and Dec. 31, 19 

Balance, Surplus, Jan. 1, 19 $9,242. 00 

Deductions: 

Dividends Declared $4,800. 00 

Net Operating Loss 4,017.78 8,817.78 

Balance, Surplus, Dec. 31, 19 $ 424. 22 



PROBLEMS 443 



EXHIBIT "D" 

PORTLAND PRODUCTS COMPANY 

BALANCE SHEET 

Dec, 31, 19 

Assets 
Current: 

Cash $ 4,525.00 

Petty Cash 100. 00 

Accounts Receivable $47 , 900. 00 

Lew: Reserve for Doubtful Ac- 
counts 1,148.00 46,752.00 

Notes Receivable 5 ,000.00 

Inventories: 

Raw Materials 14,750.00 

Work in Process 5, 100.00 

Finished Goods 27,892.00 47,742.00 

Interest Accrued on Notes Receivable 100 . 00 

Total Current Assets v . $104,219.00 

Fixed: 

Land $ 7,770.00 

Buildings $25,000.00 

"Reserve for Depreciation 6 , 000 .00 19 , 000 . 00 

Machinery and Small Tools $31 ,900.00 

Reserve for Depreciation 11, 705 .00 20 , 195 . 00 

Furniture and Fixtures $ 1 , 625 . 00 

Reserve for Depreciation 662 . 50 962.50 

Total Fixed Assets 47 , 927 . 50 

Deferred Charges to Operation: 

Bond Discount $ 250.00 

Prepaid Advertising 540 . 00 

Prepaid Insurance 278 . 50 

Total Deferred Charges to Operation 1,068.50 

Total Assets $153,215.00 

Liabilities 
Current: 

Accounts Payable $25,200.00 

Notes Payable 2,750.00 

Reserve for Water Rent 37 .00 

Interest Accrued on Notes Payable 3 .78 

Dividends Payable 4,800.00 

Total Current Liabilities 32,790.78 

Long Term: 

Mortgage Payable 10,000.00 

Bonds Payable 10,000.00 

Total Long Term Liabilities 20,000.00 

Total Liabilities $ 52,790.78 

Capital, Surplus, and Surplus Reserves 

Capital Stock $ 80,000.00 

Earned Surplus 424.22 

Surplus Reserve: 

Reserve for Working Capital 20.000.00 100,424.22 

$153,215.00 



444 COST FINDING FOR ENGINEERS 

Chapter XI 

ll-82a. Set up the following accounts in the ledger and enter therein 
the balances shown below: 

Trial Balance Dec. 31, 19 

Cash $ 5,500 

Notes Receivable 2,000 

Accounts Receivable 28 ,000 

Inventory, Jan. 1, 19 10,000 

Machinery 50,000 

Prepaid Insurance 150 

Accounts Payable $ 16,000 

Prepaid Rentals Received 360 

H. Kinsel, Capital 75,000 

H. Kinsel, Personal 1 ,000 

Sales 120,000 

Purchases 70,000 

Rent 2,400 

Wages 30,000 

Factory Expense 12,310 

$211,360 $211,360 

6. Prepare a work sheet after considering the following adjustments on 
Dec. 31, 19: 

Inventory $15,000 

Insurance 50 

Rental income 330 

Wages payable 400 

Interest earned on notes receivable 10 

Depreciation on machinery, 5 per cent per annum. 
Doubtful accounts, 2 per cent of outstanding 
accounts receivable. 

c. From the completed work sheet, prepare the following: 

1. Adjusting entries. 

2. Closing entries. 

3. Statement of profit and loss, 

4. Statement of ownership. 

5. Balance sheet. 

d. Post the adjusting and closing entries and close the operating 
accounts. 

e. Prepare a proof trial balance. 

11-83. From the trial balance and adjustments, prepare the following: 

1. Work sheet. 

2. Adjusting entries. 

3. Closing entries. 

4. Statement of income, profit and loss. 

5. Statement of ownership. 

6. Balance sheet. 



PROBLEMS 445 

Trial Balance, Jan. 31, 19 

Cash $ 5,000. 00 

Accounts Receivable 14,000. 00 

Inventory, Jan. 1, 19 18,000. 00 

Machinery and Tools 40,000. 00 

Reserve for Depreciation, Machinery $ 20,000.00 

Accounts Payable 15,800. 00 

W. Z. Ashland, Capital 42,000. 00 

W. Z. Ashland, Personal 300. 00 

Sales 30,000.00 

Purchases 21 ,700. 00 

Rent 500. 00 

Wages 7,500.00 

Factory Supplies 600. 00 

Commissions Earned 100. 00 

Insurance 300.00 

$107,900.00 $107,900.00 

The adjustments at Jan. 31, 19 were as follows: 

Inventory of merchandise $18,500. 00 

Wages accrued 500. 00 

Inventory of factory supplies 200. 00 

Commissions earned but not received 50. 00 

Insurance unexpired 275 . 00 

Depreciation on machinery and tools 333.33 

Doubtful accounts estimated to be 2 per cent of outstanding accounts 
receivable. 

Property taxes estimated to be $300. 



446 COST FINDING FOR ENGINEERS 

11-84. From the following work sheet, prepare adjusting and closing 
journal entries to close the operating accounts in the ledger: 

Trial Balance Profit and Loes Balance Sheet 

Dr. Or. Dr. Or, Dr. Or. 

Cash $ 23,418.28 $ 23,418.28 

Accounts Receivable . . 30 , 964 . 20 30 , 964 . 20 

Machinery 3,782.58 3,782.58 

Office Equipment 2,355.92 2,355.92 

Inventory, Jan. 1, 19 11,281.56 $ 11,281.56 

Land 27,000.00 27,000.00 

Building 57,490.00 57,490.00 

Accounts Payable $ 9,600.44 $ 9,600.44 

Mortgage Payable 10,000.00 10,000.00 

CapitalStock 115,000.00 115,000.00 

Surplus 3,012.78 3,012.78 

Sales 158,966.54 $158,966.54 

Sales Returns and Al- 
lowances 2,015.76 2,015.76 

Purchases 107 , 48 1 . 84 107 , 481 . 84 

Purchase Returns 1,612.10 1,612.10 

Freight and Cartage In 686 . 20 686 . 20 

Royalties 1 ,826.36 1,826.36 

Freight and Cartage 
Out 858.20 858.20 

Warehouse Expense ... 828 00 828 . 00 

Insurance 260.60 260.60 

Repairs to Building... 2,144.58 2,144.58 

Shop Supplies 400.00 400.00 

Salaries 16,855.22 16,855.22 

Taxes 1,304.44 1,304.44 

Heat and Power 1 ,021 .98 1 ,021 .98 

Commissions Earned 872.50 872.50 

Interest Expense 600 . 00 600 00 

Store Expense 3,050.20 3,050.20 

Office Expanse and 

Supplies 3,438.44 3,438.44 

$299,064.36 $299,064.36 



Inventory, Dec. 31, 

19 6,018.20 8,018.20 

Net Profit 13,415.96 13,415.96 

$167,469.34 $167,469.34 $151,029.18 $151,029.18 



11-86. Set up accounts for the items appearing in the following trial 
balance. Enter the balances in the accounts. After considering the 
adjustments, prepare the following: 

a. Worksheet. 

6. Statement of income, profit and loss. 

c. Statement of ownership. 

d. Balance sheet 

e. Adjusting entries and postings to the accounts. 
/. Closing entries. 

g. Proof trial balance. 



PROBLEMS 447 

PITTSBURGH GENERATOR CORPORATION 

TRIAL BALANCE 

Dec. 31, 19 

Cash $ 5,280.40 

Notes Receivable 1,294.44 

Accounts Receivable 44, 193 .38 

Inventory, Jan. 1, 19 19,354.38 

Securities 9,500.00 

Furniture and Fixtures 2,950.24 

Notes Payable $ 2,819.64 

Accounts Payable 14,992.04 

Capital Stock 60,000.00 

Surplus, Jan. 1, 19 2,984.74 

Sales 190,733.34 

Sales Returns and Allowances 4 , 843 . 66 

Purchases 153,717. 10 

Purchase Allowance 3 , 732 . 50 

Freight In 3,650.26 

Advertising 855 . 44 

Repairs to Furniture and Fixtures 226 . 54 

Rent 7,200.00 

Wages 21,285.34 

Stationery and Printing 1,169.32 

Janitor Service 295 . 04 

Postage 712. 80 

Taxes 231.24 

Interest on Securities 403 . 76 

Rentals Received 1,200.00 

Interest and Discount Paid 106 . 44 

$276,866.02 $276,866.02 

Adjustments Dec. 31, 19 : 

Inventory $ 15 ,038 . 68 

Wages accrued 387. 70 

Interest and discount prepaid 6 . 44 

Interest accrued on securities 66 . 94 

Rentals received unearned 50.00 

Depreciation on furniture and fixtures, 10 per cent of cost. 

Create a reserve for doubtful accounts equal to 1 per cent of the 
accounts receivable outstanding at Dec. 31, 19 . 

11-86. Set up accounts for the items listed below and enter therein 
the balances: 

Cash $ 4,530 

Inventory, Jan. 1, 19 31 ,212 

Delivery Equipment 4 , 900 

Notes Payable 2,000 

Purchases '. 114,438 

Advertising 1 , 100 



448 COST FINDING FOR ENGINEERS 

Insurance 834 

Legal Expense 660 

Postage 668 

Telephone and Telegraph 600 

Subscriptions and Dues 350 

Taxes 450 

Janitor Service 316 

Rent Expense 4, 800 

Accounts Receivable 5,856 

Store Equipment 3,650 

Freight In 5,002 

Delivery Expense 4, 900 

Profit and Loss 

Accounts Payable 11, 446 

Sales 183,020 

Purchase Returns 894 

Salesmen's Salaries 29,738 

Office Supplies 1 ,420 

Commissions Earned 1 , 730 

T. M. Buck, Drawing 4, 126 

Notes Receivable 1 , 900 

Office Furniture and Fixtures 1 ,820 

Sales Returns 4, 932 

Traveling Expenses 6 , 216 

Office Salaries 6,072 

T. M. Buck, Capital, Jan. 1, 19 41 ,400 

The adjustments to be considered at the close of the year Dec. 31, 19 
were as follows: 

1. Accrued salaries $ 500 . 00 

2. Accrued commissions earned 160 .00 

3. Inventory, Dec. 31, 19 26,311.42 

4. Depreciation on delivery equipment, 25 per cent of cost. 
6. Depreciation on store equipment, 10 per cent of cost. 

6. Depreciation on office furniture and fixtures, 8 per cent 

of cost. 

7. Insurance prepaid S 234 . 00 

8. Create a reserve for doubtful accounts equal to one-fourth of 

one per cent of the net sales. 

Prepare the following: \ 

a. Adjusting journal entries, and postings to the ledger accounts. 

b. Closing journal entries, and postings to the ledger accounts. 

c. Post-closing trial balance. 



PROBLEMS 449 

11-87. From the following trial balance and adjustments, prepare the 
following : 

a. Work sheet. 

6. Adjusting entries. 

c. Closing entries. 

d. Statement of profit and loss. 

e. Statement of surplus. 

/. Statement of financial condition. 

BEECHWOOD TRADING CORPORATION 

TRIAL BALANCE 

Dec. 31, 19 

Cash $ 10,000 

Notes Receivable 25,000 

Notes Receivable Discounted $ 4, 100 

Accounts Receivable 40,600 

Reserve for Doubtful Accounts 110 

Inventory, Jan. 1, 19 21 ,000 

Furniture and Fixtures 3 , 000 

Reserve for Depreciation, Furniture and Fixtures 1 , 600 

Automobiles 5 , 000 

Prepaid Insurance 1 ,000 

Accounts Payable 12 ,000 

Prepaid Rentals Received 800 

Mortgage Payable 10,000 

Capital Stock 70,000 

Surplus 4,690 

Sales 170,000 

Purchases 120,000 

Wages and Salaries 20,000 

Rent 6,000 

Office Expense 2,500 

Advertising 20,000 

Interest on Mortgage 300 

Commissions Earned 1 , 200 

$274,400 $274,400 

The adjustments to be tiken into consideration on Dec. 31, 19 -are as 
follows : 

Inventory $16,500 

Commissions earned but not received 150 

Insurance unexpired 500 

Wages due but unpaid 800 

Rentals earned 750 

Depreciation on furniture and fixtures, 10 per cent on cost. 
Depreciation on automobiles, 25 per cent on cost. 
Doubtful accounts are estimated to be % of 1 per cent of the 
outstanding accounts receivable. 



450 COST FINDING FOR ENGINEERS 

Interest accrued on mortgage payable for six months at 6 per cent 

per annum. 

11-88* From the following adjusted trial balance, prepare the entries 
necessary to close the operating accounts: 

THE MODEL MACHINE SHOP 

TRIAL BALANCE 

Jan. 31, 19 

Cash $ 10,000 

Accounts Receivable 28,000 

Stores Inventory 20,000 

Work in Process Inventory 2 , 000 

Finished Goods Inventory 1 ,000 

Machinery and Tools 48,000 

Reserve for Depreciation, Machinery and Tools $ 24,400 

Accounts Payable 20,000 

Capital Stock 60,000 

Surplus 3,880 

Sales 20,000 

Sales Returns 400 

Raw Materials Used 7,000 

Rent 200 

Direct Labor 9,000 

Indirect Labor 500 

Depreciation, Machinery and Tools 400 

Shop Expense 500 

Power 300 

Fuel, Forge Department 100 

Office Expense 50 

Sales Salaries 800 

Telephone 25 

Postage 15 

Interest Earned 10 

$128,290 $128,290 

ll-89a. On Jan. 1, 19 , the financial condition of H. Baker was repre- 
sented by the following account balances : 

H. Baker, Capital $34,000.00 

Inventory 9,500.00 

Notes Receivable 3,000.00 

Accounts Payable 13,000.00 

Furniture and Fixtures 1 , 500 . 00 

Cash 4,345. 12 

Accounts Receivable 28,312.40 

Notes Payable 1,000.00 

Delivery Equipment 1 ,342 . 48 

Record the above balances in ledger accounts: 



PROBLEMS 451 

6. During the year 19 , the transactions, in summarized form, were 
as follows: 

Sales to customers on account $115,684.20 

Purchases from creditors on account 59, 912. 54 

Wages paid in cash 21,892.40 

Rent paid in cash 4, 800 . 00 

Customers remitted cash 123 , 407 . 70 

Office expense paid in cash 1 , 521 . 80 

H. Baker withdrew merchandise costing 550. 00 

Creditors were paid, 63,084.40 

Customers paid off notes 2 , 500 . 00 

Creditor's note paid in full 1,000.00 

Customers were allowed for damaged goods 931.46 

Interest received on notes receivable (Cash) 120 . 00 

Delivery expenses paid in cash 2,820. 00 

Freight and cartage in 1 , 712 . 20 

Record the summary transactions in the proper accounts. 

c. Prepare a trial balance. 

d. Prepare a work sheet. (Inventory at Dec. 31, 19 amounted to 
$10,218.46; depreciation on delivery equipment, 25 per cent of cost; 
depreciation on furniture, 15 per cent of cost.) 

e. Prepare in proper form the following statements: 
Statement of income, profit and loss. 
Statement of ownership. 

Balance sheet. 

/. Prepare adjusting and closing entries and make the postings to the 
ledger. 

Chapter XII 

12*90. Classify the following expenditures and give specific reasons 
for your classifications: 

1. Freight on a heat-treating furnace purchased for a plant. 

2. Replacing a worn-out roof on a building immediately after it was 
purchased. 

3. Replacing a generator on an automobile. 

4. Repairing a generator on an automobile. 

5. Fire insurance on a building under construction. 

6. Fees paid to a promoter for organizing a corporation. 

7. Repainting the body of an automobile truck, which included the 
firm's name and the nature of the business. 

8. Landscaping the ground around a factory office building. 

9. Relaying a concrete driveway leading to 'a storage warehouse. 

10. Replacing a portion of a factory building wooden floor. For the 
past ten years, the company had been building up periodically a balance 
in the account, Reserve for Non-recurring Building Expenses. 

12-91. The following transactions deal with an automobile truck. 
Classify each of the expenditures as to capital and operating and indicate 



452 COST FINDING FOR ENGINEERS 

the specific nature of each. Also show the entry or entries for each 
transaction: 

1. The auto truck chassis was purchased for $650, with an allowance 
of $80 being given for the old truck. 

2. A special body was purchased for the chassis at a cost of $300. 

3. Accessories were purchased at a cost of $30, which were not 
included with the special body. 

4. State license plates cost $20. 

5. The firm's name, and nature of the business engaged in, was 
painted on the body of the truck at a cost of $30. 

6. During the first year, the brakes were relined at a cost of $36. 

7. A new set of tires was purchased during the second year at a cost of 
$75. 

8. A cracked cylinder block necessitated the buying of a new engine 
during the second year at a cost of $200. 

9. A spare tire was stolen during the third year after the purchase of 
the truck, which was not insured. The new tire purchased to take the 
place of the one stolen cost $20. 

10. At the end of the third year, the truck was given a complete over- 
hauling at a cost of $180. 

11. A new battery was purchased for the truck at a cost of $18, with a 
credit allowance of $1 being given for the old battery. 

12. The truck was totally wrecked in the fourth year, for which there 
was no insurance coverage. After the depreciation adjustment charge 
for the fourth year, the undepreciated cost of the truck was $340. 

12-92. Give the specific nature of the expenditures in each of the 
following cases: 

1. A large office building was purchased for $500,000 three years after 
it was constructed. After the purchase, the building was remodeled at a 
cost of $75,000. 

2. A new auto truck was purchased. A week after it was delivered 
and had been in daily use, the owner purchased a spare tire costing $41. 
One week after the spare tire was purchased, it was stolen and another 
one was purchased to take its place at a cost of $41. 

3. A department store completely overhauled its fleet of 40 trucks 
during January. The original cost of the trucks three years ago was 
$80,000, and they had been depreciated 75 per cent to date. The cost of 
overhauling the trucks was $10,000. It was estimated that the overall 
life of the trucks would be five years. What is the nature of the $10,000 
expenditure? 

4. The North Woods Paper Company installed a sprinkler system 
throughout the building at a cost of $15,000. By so doing, the insurance 
rate was decreased 40 per cent. The original value of the building was 
$120,000 and it will be entirely depreciated in six years. What disposi- 
tion should be made of the $15,000 expenditure? 

5. The Freeport Coal Company spent $20,000 to pump out the water, 
and otherwise to recondition a ojice abandoned coal mine, in order to start 
operations. The coal deposit was estimated to be removed in four 
years' time* 



PROBLEMS 453 

6. A steam shovel originally costing $12,500, and which had been 
running for two years, had to have a new scoop placed on it because the 
original one was worn out. The scoop cost $1,500. The shovel has 
been depreciated on a 12^ per cent straight line basis. 

7. A shed was originally built five years ago to store machinery, at a 
cost of $20,000, and was estimated to have a life of twenty years. The 
shed was completely remodeled in order to serve as a warehouse for 
storage of cement. The remodeling cost amounted to $15,000. How 
would you take care of the $15,000 expenditure? 

8. A machine originally costing $9,000 and in use for four years had 
been depreciated by the straight line method at the rate of 20 per cent 
per annum (no scrap value being predetermined). At the beginning of 
the fifth year, this machine was traded in for a new one costing $12,000. 
An allowance of $1,000 was made on the old machine. The cost of 
installing, labor, materials, etc., was $1,000. The maintenance of the 
machine during the first year cost $1,332.43. Classify each of these 
expenditures. 

12-93. The Crescent Construction Company engaged in a general 
building construction business. One of their projects engaged in was 
the building of a bridge across a large rivfcr. During the process of 
construction, a portion of the new construction work collapsed, which 
resulted in 10 workmen being killed. An accumulated cost of $50,000 
for materials, labor and overhead, which appeared in the Construction in 
Process account, was also lost. 

1. How would the cost of reimbursing the widows of those killed be 
reflected in the cost of the project? 

2. How would the $50,000 loss be handled? 

12-94. The board of directors of the Colonial Carbide Corporation 
decided to extend its operations, and, accordingly, purchased a piece of 
land with an old building on it for $42,000. The building was razed at a 
cost of $1,000, from which salvaged materials were sold for $240 cash. 
In connection with the purchase of the property, a surveyor was paid 
$150 for verifying the boundary lines, and an attorney was paid $200 for 
searching the title and recording the deed for the property. Rubbish 
which had been dumped on the ground prior to the purchase was hauled 
away at a cost of $75. 

At what value should the Land account be shown after considering all 
of the above information? 

Chapter XIII 

13-95. The books and records of the Burlington Manufacturing Com- 
pany revealed the following information on Dec. 31, 19 , the close of 
the fiscal year: 

Purchases of raw materials, $^00,000. 

Inventory of raw materials, Jan. 1, 19 , $90,000 (cost). 

Inventory of raw materials, Dec. 31, 19 , $80,000 (cost). 

The market value of the inventory at Dec. 31, of the same year, was 
$72,000. 



454 COST FINDING FOR ENGINEERS 

a. At what figure should the inventory be shown on Dec. 31 in the 
balance sheet? Give reasons in detail. 

6. Considering that for the same year, the sales were $1,200,000 and 
the marketing and administrative expenses were $250,000, in addition 
to the above figures for purchases and inventories, prepare a profit and 
loss statement. State your reasons in full to justify your method. Show 
any necessary accompanying journal entry or entries. 

c. What entry, if any, would be necessary if it was almost certain that 
the inventory value of $72,000 on Dec. 31, 19 , would decline at least 
$5,000 more in value in the following year, before the raw materials would 
be consumed? 

d. If the market value of the closing inventory at Dec. 31, 19 , had 
been $96,000 instead of $72,000, what effect would it have had on the 
net profit for the year in which the increase had taken place? 

13-96. Which of the following items should be included in the cost of 
an inventory? Those which are not proper inventory costs should be 
charged to what other accounts? 

1. Inspection expenses pertaining to raw materials. 

2. Labor cost in taking a physical inventory. 

3. Freight and cartage charges on incoming materials. 

4. Labor cost in transferring materials from one location to another 
in the storeroom. 

5. Value of materials stolen from storeroom. 

6. Salvage material which can again be utilized, that was withdrawn 
from the storeroom but unused in the shop, and later returned to the 
storeroom. 

7. Deterioration and obsolescence costs due to the effect of weather 
on materials and out-of-date materials.- 

8. Cost of keeping stores records. 

9. Cost of operating purchasing department. 

10. Cost of newly improved bins installed to facilitate the handling of 
the stores. 

13-97. The Chatfield Woods Company received a note for $1,913.46 in 
payment of an account with the Pulp Paper Company. The note was 
dated Nov. 15, 19 , matured 60 days from date, and carried interest at 
6 per cent. Thirty days after date, the Chatfield Woods Company dis- 
counted the note at the bank, which charged a discount rate of 6 per cent. 
Under what heading or headings and at what value should the note be 
carried on the balance sheet on Dec. 31, 19 ? 

13-98. The Capital Construction Corporation purchased a patent on a 
concrete hoisting and pouring machine, paying $34,000 cash for it on 
July 1, 1930. Up to the present time the corporation has never made 
use of the patent nor collected any royalties on same. 

a. What entry should have been made at the time of the purchase? 

6. Should any entry or entries have been made since the date of the 
purchase? If so, prepare the same. 

c. At what value, and in what statement should the patent be shown 
on Dec. 31, 1935? 

d. If the right to manufacture the machine had been contracted with 
another concern on the basis of $10 for each machine manufactured, 



PROBLEMS 455 

what entry would the Capital Construction Company have made if 500 
machines were manufactured during 1935? 

13-99. The Bordeaux Company had some cash on hand on Jan. 28, 
1933, which they did not need for current operating expenses until some- 
time in October of the same year. The board of directors decided to 
invest $15,000 in 2^ per cent County Bonds, interest payable Jan. 1 and 
July 1 of each year. The bonds were purchased on Jan. 31 at face value 
plus accrued interest. On July 1, when a semi-annual balance sheet was 
prepared, the bond market was slightly depressed, and the market price 
of the above bonds was listed at 96. The bonds were sold Oct. 15th at 



a. Show entries for the above transactions on Jan. 31, July 1, and 
Oct. 15. 

6. At what figure should the bonds be shown on the balance sheet at 
July 1? 

13-100. The Steel Tank Company manufactured a varied line of 
machinery. Much of this machinery was shipped in pieces, which were 
assembled at the plants of the purchasers. Consequently, the company 
employed a number of assemblymen, who were given expense money 
when they were sent out of town. On June 1, 19 , the balance in the 
Advances to Road Workmen account was $997. During June, the men 
were advanced a total of $1,110. On June 30, 19 , a summary of 
the expense accounts supported by receipts disclosed the following 
information : 

Meals ..................................... $ 950 . 50 

Hotel ..................................... 720.00 

Transportation ............................. 345 . 10 

Postage and Telephone ..................... 7 . 00 

$2,022.60 

a. Show all necessary entries to record the above transactions on the 
books of the company. 

6. State the amount and the name of the statement on which would 
appear the balance of the Advances account on June 30. 

13-101. Under what group headings would the balances in the follow- 
ing accounts appear in the balance sheet? 

1. Relocation of machinery 

2. Unamortized bond premiums 

3. Prepaid bond expense 

4. Discount on capital stock 

5. Customers' cash advances 

6. Prepaid consulting fees received 

7. Petty cash 

8. Accrued interest on notes receivable 

9. Reserve for unemployment insurance 
10. Options on oil and gas land 

13-102. From the following data, you are to prepare a statement of 
income, profit and loss and a balance sheet on July 31, 1935: 



456 COST FINDING FOR ENGINEERS 

Sales $200,000 

Purchases 130,000 

Marketing and Administrative Expense 87,000 

Cash 14,00(0 

Plant and Equipment 120,000 

Accounts Payable 10,000 

Capital Stock 130,000 

Surplus 11 ,000 

Inventory, July 31, 1935 (cost value $20,000, and market 
value, $16,000) 

Chapter XIV 

14-103. A building and a piece of land were deeded to the Wear- Well 
Piston Ring Manufacturing Company by the Jeanette Land Develop- 
ment Company on June 30, 1930. The building cost the original owners 
$40,000 on July 1, 1910, and had been depreciated at the rate of 3 per 
cent per annum, while the land cost them $10,000. The Wear- Well Com- 
pany had the property appraised at the time they acquired it, the 
appraisal value being set at $20,000 for the building and $20,000 for the 
land. 

What entry should be made on the books of the Wear- Well Company 
on June 30, 1930? What policy should be adopted toward depreciating 
the building, and what would be the adjusting entry for the same at 
Dec. 31, 1930? 

14-104. A machine tool building concern manufactured a machine for 
its own use. The materials cost $1,540.67, and the labor cost, $2,088.90. 
If the overhead cost during the time required for construction was 150 
per cent of the direct labor cost, at what value should the machine be 
shown on the books of the company? Show by journal entry. 

14-106. The Duquesne Steel Drum Corporation, a going concern, 
built an addition to their plant costing $150,000. Although the contract 
was let to a construction concern to build the addition, the plant super- 
intendent spent an hour a day for four months looking after certain 
details of construction which were considered to be most important from 
a production viewpoint after the addition was'completed. If the super- 
intendent received a regular salary of $450 a month, what entry, if any, 
would you make to record it during any one of the four months? Give 
full explanation for your journal entry, if you decide that you should 
make one. 

14-106. The Ohio River Navigation Company purchased a steamboat 
from a competitor for $80,000 cash on July 1, 1929. The boat was esti- 
mated to have a useful life of 20 years after the date of the purchase. 
The company spent $10,000 in making improvements which were com- 
pleted on Dec. 31, 1929. Before the company had an opportunity to 
place the boat in service, business conditions became depressed and the 
boat was not placed into use up to December 31, 1935. 

a. What disposition should be made of the charges each year including 
$100 a month for watchman's wages, $600 annual fire insurance, and the 
depreciation? Show the journal entries for the year 1930. 



PROBLEMS 457 

/ 

6. During 1933, ice floes damaged the hull, and repairs amounting to 
$1,500 were made in order to keep the boat afloat. Prepare a journal 
entry for this expenditure, assuming that there was no insurance coverage. 

c. On Dec. 31, 1935, the company sold the boat for $50,000. Prepare 
the entry at this date. 

14-107. The Newport Novelty Company organized and commenced 
manufacturing operations on Jan. 1, 1935. At that time they purchased 
small tools amounting to $6,500. During 1935, they purchased addi- 
tional small tools to replace those broken, worn out, lost and stolen for 
$1,300 cash. Show by journal entry and explanation how the replace- 
ments made during 1935 could be handled in two different ways. 

14-108. The Ever Wear Paint Company manufactures a large variety 
of paint, varnish and oils. Some of the products are shipped in steel 
drums, the cost of which was $5 each when originally purchased. When 
the first 1,500 drums were purchased, the cost was charged to a Con- 
tainers account. The drums are depreciated on a straight line basis at 
the rate of 12 K per cent per annum. 

1. In connection with the control of the drums, what entry should be 
made when a shipment of 10 drums of oil is made to a customer? 

2. What entry should be made when the drums are returned to the 
company? 

3. What entry should be made if the drums are never returned? 

14-109. The Keystone Products Company, Inc., organized a manufac- 
turing business in Pennsylvania. The Civic Club of Washington, the 
city in which the plant was to be located, donated a plot of ground on 
which they placed a value of $5,000. The building erected thereon was 
valued at $20,000 by the seller, but was sold to the Company for $10,000 
cash. After the Company acquired the land and building they had an 
appraisal made, which showed the values to be $12,000 and $25,000 for 
the land and building respectively, 

a. Show the necessary entries to record the above transactions. 

b. Upon what value would the depreciation be based for operating 
cost purposes? 

14-110. A building was completed on Jan. 1, 1915 at a cost of $80,000. 
It was depreciated by the straight line method on a basis of 2K per cent 
per annum. On Jan. 1, 1928, an appraisal fixed the reproduction value 
new at $110,000, and the building would probably be replaced by Jan. 1, 
1945. 

Prepare the journal entry or entries on the date of the appraisal. 
Show clearly your computation for the sound value at the date of the 
appraisal. 

If the building was demolished, on December 31, 1939, what would be 
the entry or entries if the cost of demolition was $5,000 and the salvage 
value of the materials was $3,000? 

14-111. On Jan. 1, 1921, a manufacturing company purchased a piece 
of machinery, which cost $6,100 installed. It \^as estimated to have a 
useful life of ten years, and a residual value of $100. 

On Jan. 1, 1929, an appraisal showed this machine to have a replace- 
ment value of $9,000, and it was estimated that it would render useful 



458 COST 7 FINDING FOR ENGINEERS 

service for seven more years after the date of the appraisal, with the same 
original residual value. 

1. What was the sound value on Jan. 1, 1929? Show the computation 
in detail. 

2. Prepare the entry or entries to record the sound value on Jan. 1, 
1929. 

3. Show the adjusting entry to record the depreciation for the year 
ended Dec. 31, 1929. 

4. Prepare the entry to record the disposal of the machine on Jan. 1, 
1935, when it was sold as junk for $30 cash. 

14-112. A machine was purchased Jan. 1, 1921, and was capitalized 
at a cost of $30,000. It was estimated to have a useful life of 20 years, 
and it was depreciated on the straight line basis with a Reserve for 
Depreciation account being used to accumulate the annual credits to 
offset the depreciation charges. On July 1, 1928, an appraisal was made 
which disclosed that the isset had an appraisal value of $22,000, and a 
continued useful life in accordance with the original estimated life. 
Prepare the following entries: 

1. To record the purchase. 

2. To record the accumulated depreciation from Jan. 1, 1921 to June 
30, 1928. 

3. To record the appreciation. 

4. To record the depreciation for the last six months of 1928, assuming 
depreciation is based upon original cost. 

Also state the amounts representing: 

5. Book value at June 30, 1928. 

6. Appraisal value at June 30, 1928. 

7. Sound value at June 30, 1928. 

14-113. The Hartford Corporation expended considerable sums in 
developing new scientific apparatus. Before work was commenced upon 
the development of any new apparatus, by the research engineering 
division, a development order was issued by the administrative division. 
As work progressed on the different projects, the cost of materials, labor 
and overhead expenses were charged to the proper development order 
number maintained as an auxiliary record. A general ledger account, 
Research and Development, was used to charge the cost of development 
for all orders. 

Under the above conditions, prepare entries for the following trans- 
actions: 

1. During 1934, the total development and research costs amounted to 
$216,400. 

2. Apparatus developed during 1934, at a cost of $142,000 was patented 
during 1934. The cost of obtaining the patents amounted to $6,000. 

3. Apparatus developed during 1934, at a cost of $60,000, was not 
patented during 1934, but there was every reason to believe that patents 
would be obtained thereon during 1935. Patent attorney fees and other 
expenses pertaining to these pending patents of 1934 amounted to 
$3,500. 

4. The remaining development costs of 1934 were considered to, be of 
no value. 



PROBLEMS 459 

5. On Feb. 15, 1935, a competitor brought suit for $200,000 against the 
Corporation for alleged infringement of patent rights. The patents in 
question had cost the Hartford Corporation $48,520. 

6. The board of directors of the Corporation decided to safeguard their 
financial position by creating a reserve for the possible damages that 
might be awarded to the competitor, which was done on Mar. 1, 1935. 

7. Consider that the patent suit against the Hartford Corporation 
resulted in an adverse decision against them, and that the court awarded 
money damages of $125,000, with an order to desist from further use of 
the patents in question without royalty payments to the competitor. 
The damages were paid on Nov. 28, 1935, and the Corporation ceased 
manufacturing the apparatus covered by the patents in question. The 
cost of defending the damage suit amounted to $12,000, which was paid 
on Dec. 15, 1935. 

8. Consider that the patent suit against the Corporation resulted in a 
favorable decision to the Corporation Nov. 1, 1935, and that the cost of 
defending the damage suit amounted to $12,000, which was paid on 
Dec. 15, 1935. 

9. Adjustment for the Patent account for the fiscal years ended Dec. 
31, 1934 and Dec. 31, 1935. 

14*114. The Plymouth Petroleum Company purchased lease options 
on 1,000 acres of prospective oil sites on Oct. 1, 1932, for $50,000. The 
options expired on Oct. 1, 1935, at the end of the three-year period, with- 
out the Company exercising the right to drill on the property. 

a. What entry should have been made on Oct. 1, 1932? 

6. What final disposition would be made of the $50,000 paid for the 
option ? 

14-115. The Monon Metal Company leased a warehouse for a term 
of five years for $50,000. What would the entries be: 

a. If the payment was made in advance in full? 

b. If the payment was made in advance annually? 

c. If the payment was made in advance monthly? 

14-116. The Penn Water Company incurred expenditures of $10,000 
in obtaining franchises to lay their water lines in certain townships, 
boroughs, and a city. Prepare the entries: 

a. To provide for the expenditure. 

6. To account for the item at the end of each month thereafter, under 
the assumption that: 

1. The franchise was for 50 years. 

2. The franchise was for an indefinite period of time. 

3. The franchise was perpetual. 

14-117. The Noble Company incurred the following expenses in con- 
nection with obtaining a trade-mark for their product on Dec. 31, 1930: 

Designer's fee $200 

Artist's fee 100 

Attorney's fee 100 

$400 



The net sales and net profits of the company for the next five years 
follows: 



460 COST FINDING FOR ENGINEERS 

Net Sales Net Profits 

$ 50,000 $ 500 

90,000 2,700 

115,000 4,600 

150,000 7,500 

200,000 12,000 

The increase in sales was attributed to the quality of the product as 
covered by the trade-mark. The capital invested from the beginning 
was $100,000. 

a. Were there any factors involved that have given rise to goodwill? 
If not, why not? If so, how could the valuation be arrived at for the 
goodwill? Would there be any entry for the goodwill? 

b. What entry should have been made on Dec. 30, 1930, to record the 
payment of the fees? 

c. At what value should the trade-mark be shown on Dec. 31, 1935? 
14-118. The News Publishing Corporation began business in 1924 with 

a capital stock of $100,000, which was not changed in amount since that 
date. The operating results for the years 1929 to 1935 inclusive are as 
follows: 

Profits and Losses 
Year for the Year 

0929 $15, 000 profit 

1930 10,000 profit 

1931 7,,000 profit 

1932 2,000 loss 

1933 3,000 loss 

1934 8,000 profit 

1935 11,000 profit 

In anticipation of selling the business, three bases were used in com^ 
puting the value of the goodwill to be charged to the purchaser: 

1. Five years' purchase price of the average profits (including losses) 
of the past seven years which were in excess of 6 per cent of the capital 
stock outstanding. 

2. Capitalizing at 10 per cent the average profits (including losses) of 
the past seven years, which were in excess of 6 per cent of the capital 
stock outstanding. 

3. One year's purchase price of the average profits (including losses) 
of the past seven years. 

a. Calculate the amount of goodwill in each of the three bases. 

b. What entry would be made for the goodwill if the second basis was 
agreed upon? 

c. Which basis do you believe to be the most equitable plan? Explain 
fully. 

14-119. In connection with the problem immediately preceding, con- 
sider the following data. The balance in the Surplus account on Jan. 1, 
1929, was $23,000. A dividend of 6 per cent has been paid every year 
from 1929 to 1935 inclusive. Federal income taxes of $7,000 were paid 



PROBLEMS 

during the period 1929-1935 inclusive. No other debits or credits were 
made to the Surplus account, during this period of time except the net 
profits and net losses each year and the income taxes. 

1. What entry or entries would be made on the books of the News 
Publishing Corporation, if it sold its business to Robert McChesney on 
the following terms? McChesney took over all of the asset values, 
assumed the liabilities, agreed to the payment of the goodwill computed 
on basis number 3, and gave a check in full for the purchase price of the 
business. The liabilities amounted to $30,000. 

2. What would be the entry or entries made on the books of Mr. 
McChesney to show the purchase of the business? 

Chapter XV 

16-120. Record the following transactions in the following special 
journals: 

a. Cash receipts journal, with money columns for cash, sales discount, 
accounts receivable, and general ledger. 

6. Voucher register with money columns for accounts payable, pur- 
chases, factory expense, and general ledger debit. 

c. Check register with money columns for cash, purchase discount, 
and accounts payable. 

d. Sales journal with money columns for accounts receivable, depart- 
ment "A" sales, and department "B" sales. 

e. General journal with debit and credit money columns for accounts 
payable, accounts receivable, and general ledger. 

19 

July 1. A. N. Fox opened a business, engaging in the manufacture of 
small electrical apparatus. He invested $50,000 cash which 
was placed on deposit in the Craig National Bank. 

2. Purchased and received $18,750 raw materials on account, 
n/30, from the Union Supply Company. 

3. Purchased and received $450 small tools from Standard Tool 
Company, 2/10 n/30. Charge to factory expense. 

6. Purchased and received machinery and shop equipment from 
Sones Machine Company on account, 1/10 n/30, $15,000. 

8. Purchased and received miscellaneous factory supplies on 
account, 2/10 rn/30, $1,500 from Gem Supply Company. 

13. Sent a check to Standard Tool Company for account in full 
less discount. 

14. Purchased and received two auto trucks from Dale Auto 
Company, $2,000 for which cash was paid. 

15. An inventory of finished goods having become available, a 
sale is made on account to Blair and Company, $6,000, 
1/10 n/30, from Dept. "A." 

16. Sent a check for $500 to L. M. Freese Realty Company for 
factory rent for July. 

17. Purchased and received office supplies from C. M. Pinks 
Company, on account, $200, 1/10 n/30. 



462 COST FINDING FOR ENGINEERS 

18. Sold Hayes and Guthrie finished goods, from department 

"B," on account, $10,000, 1/10 n/30. 

Sent a check to Gem Supply Company for account in full, 

less discount. 
21. Sold Corona Corporation on account finished goods: from 

Dept. "A," $4,000; from Dept. "B," $4,000, 1/10 n/30. 
24. Sold Laketon Department Stores, on account, finished goods, 

$9,000, from Dept. "B," 1/10 n/30. 

27. Sold Hillman and Cole, on account, finished goods, from 
Dept. "A/ 1 $4,000, 1/10 n/30. 

28. Received a check from Hayes and Guthrie for their account 
in full, less the discount. 

30. Paid payroll for the month of July, in the amount of $16,000. 

31. Received a check from Corona Corporation for one-half of 
their account less the discount on the amount. 
Purchased and received raw materials from Greenville Steel 
Company, on account, $10,000, 1/10 n/30. 

Received a 60-day 6 per cent note from Blair and Company 

in full settlement of their account. 

Sent a 30-day 6 per cent note to Union Supply Company in 

full settlement of our account. 

15*121. Record the following transactions in special journals, using 
separate columns for miners' supplies and builders' supplies in both the 
voucher register and the sales journal. 



Mar. 2. J. B. Neal opened a miners' and builders' supply business, 
investing $20,000 cash which was deposited in the Buckeye 
National Bank. 

3. Paid rent of $200 for storeroom and office to the Knox Realty 
Company. 

4. Purchased and received miners' supplies on account from 
Neely Supply -Company, $6,000, 1/10 n/30. 

5. Purchased and received builders' supplies from Toledo Lime 
Company, $5,000, 2/10 n/30. 

7. Purchased and received office supplies from Wilkins Supply 
Company for which a check of $100 is mailed. 

10. Sold on account to Valley Mines, Inc., mine supplies $4,600, 
1/10 n/30. 

11. Sold on account to Etna Supply Yard builders' supplies, 
$5,000, 1/10 n/30. 

12. Received a bill of $75 from the Post Gazette for advertising. 

13. Purchased a delivery truck from Caldwell Auto Company, 
paying $1,000 cash. 

Sent a check to Neely Supply Company in full payment of 
account, less the discount. 

Purchased and received miners' supplies on account from 
National Iron Works, $8,000, 2/10 n/30. 

14. Sold builders' supplies on account to McCrady-Rodgers, 
$2,000, 1/10 n/30. 



PROBLEMS 463 

16. Paid wages of $1,590 by cash, the check being drawn payable 
to the cashier. 

17. Sold Millvale Coal Company miners' supplies on account, 
$4,100, terms, 1/10 n/30. 

20. Received a check from Valley Mines, Inc., in settlement of 
their account in full less the discount. 

21. Etna Supply Yard returns builders' supplies billed to them 
at $500. 

24. Received a check in settlement of one-half of the account of 

McCrady-Rodgers less the discount. 
26. Purchased and received cement from Universal Cement 

Company on account, $10,000, 1/10 n/30. 
28. Received a 30-day note with 6 per cent interest from Millvale 

Coal Company in settlement of their account. 
31. Sold builders' supplies to J. C. Mays on account, $1,560, 
1/10 n/30. 

Paid wages, $1,200, the check being drawn in favor of the 
cashier. 

16-122. Record the following transactions in the following special 
journals. 

a. Cash receipts journal with money columns for cash, sales discount, 
accounts receivable, and general ledger. 

6. Cash disbursements journal with money columns for cash, pur- 
chase discount, accounts payable, and general ledger. 

c. Sales journal with money columns for accounts receivable, depart, 
ment "A" sales, department "B" sales. 

d. Purchase journal with money columns for accounts payable, depart- 
ment "A" purchases, department "B" purchases. 

e. General journal with debit and credit money columns for accounts 
payable, accounts receivable, and general ledger. 

19 

July 1. The Empire Corporation was authorized to issue 1,000 shares 
of common capital stock with a par value of $100. 

2. The stock was issued as follows: 
800 shares for cash. 

50 shares for land. 
150 shares for a building. 

3. Purchased and received materials for Dept. "A," $18,000, 
1/10 n/30, from Newbank and Company. 

5. Purchased and received materials for Dept. "B," $20,000, 

2/10 n/30, from G. M. Akin Company. 
7. Paid cash for office supplies, $50. 
9. Sold to Boggs and Company from Dept. "A," $4,000, 

1/10 n/30. 
11. Sold to Roth and Jackson from Dept. "B," $5,000, 1/10 

n/30. 

13. Returned merchandise to Newbank and Co., $200. Paid 
them $10,000 on account, deducting the discount. 

14. Boggs and Company return merchandise, $500. 



464 COST FINDING FOR ENGINEERS 

15. Paid G. M. Akin Company account in full. 

16. Received check from Boggs and Company in full settlement 
of account. 

19. Purchased equipment on account from Rex Equipment Com- 
pany, $20,000, 1/10 n/30. 

21. Purchased and received from Old Colony Company merchan- 
dise as follows: for Dept. "A," $16,000, and for Dept. "B," 
$14,000, 1/10 n/30. 

23. Sold to Schultz and Company, from Dept. "A," $1,000, 
Dept. "B," $2,000, 1/10 n/30. 

29. Received a check from Schultz and Company for $1,485, net 
after the discount was deducted. 

30. Payroll paid by cash, $5,000. 

15-123. Record the following transactions in the following special 
journals: 

a. Cash receipts with mon,ey columns for cash, sightseeing revenue, 
prepaid rentals, freight and express revenue, and general ledger. 

b. Voucher register, with money columns for accounts payable, print- 
ing and stationery, engine fuel and oil, flying personnel salaries, airport 
salaries, and general ledger debit. 

c. Check register with money columns for cash, purchase discount, 
and accounts payable. 

d. General journal with a debit and a credit money column for general 
ledger. 

19 

Apr. 1. H. C. Pavian engages in the business of operating an airport. 
He deposited $50,000 cash in the Perm National Bank to be 
used in purchasing equipment and for working capital. 

2. He acquired title to a 500-acre plot of ground, to be used as a 
landing field, for a consideration of $20,000 cash and a 3-year 
mortgage for $30,000 with interest at 6 per cent. 

3. A contract was given to the Cornith Contracting Corporation 
for grading the landing field. The grading was to be com- 
pleted within 30 days at a contract price of $10,000, one- 
half of which was to be paid on Apr. 15, and the balance upon 
the completion of the job. 

4. Another contract was let to the Keystone Construction Com- 
pany for the building of a hangar, a repair shop, a gasoline 
and oil station, and a waiting room and office building. The 
contract price was $80,000, the terms of which were $10,000 
cash at the time of letting the contract and the balance in 
four promissory notes with interest at 6 per cent, payable 
quarterly, the first note falling due on July 1. 

6. Mr. Pavian borrowed $50,000 from the Penn National Bank 
by discounting his own promissory note for 90 days at 6 per 
cent. The proceeds of $49,250 were placed on deposit in his 
checking account. 

8. Purchased and received two airplanes, to be used in making 
special flights and for sightseeing trips from the Alpha Air- 
plane Company, on account, $27,500, terms 2/10 n/30. 



PROBLEMS 465 

10. Printing and stationery for use in the office was purchased 

from the Newman Printing Company on account, $62. 
12. Sightseeing trips brought in cash receipts of $210. 

14. Received an invoice from the National Oil Company for 
gasoline, $192, and oil, $30, for airplane engines, $222, terms 
1/10 n/30. 

15. Sent a check to the Cornith Contracting Corporation for 
$5,000 on account. Payroll for the first half of the month 
was paid by cash as follows: 

Pilots $350. 

Mechanics 300. 

Clerks 500. 

16. Purchased an automobile fuel truck from Ellsworth Sales 
Agency, paying $2,000 cash. 

17. Sent a check to Alpha Airplane Company for their account in 
full less the discount. 

18. Purchased insurance policies for various types of casualty and 
liability coverage for periods of from one to three years, pay- 
ing cash, $660. 

19. Cash receipts from sightseeing trips amounted to $390. 

20. Purchased office and waiting-room furniture and fixtures 
from Airways Equipment Company, $6,800, 1/10 n/30. 

22. Received a check for $1,000 from the National Airway Lines 

for one month's rent, in advance, for the use of the airport as 

a passenger station. 
24. Pavian withdrew $300 cash for personal use. 

Sent a check to the National Oil Company for their invoice 

of Apr. 14, less discount. 

26. Received $500 cash for making a special trip to Chicago for 
the delivery of a shipment of freight. 

27. Sent a check to Duquesne Light Company for $3,500 for 
field lighting equipment installed, 

28. Paid $30 cash to the Bell Telephone Company for service 
during April. 

30. Payroll for the last half of the month was paid by cash as 
follows: Pilots $350, Mechanics $300, Clerks $650. 

Chapter XVI 

NOTE: Use any of the problems in Chap. XV, for which journal entries 
only have been made for the purpose of: 

1. Making the postings to the general ledger accounts. 

2. Making the postings to the customers' ledger accounts where 
required. 

3. Preparing a trial balance. 

4. Proving the balances in the control accounts in the general ledger. 
16-124. 1. Record the following transactions in the following special 

journals: 

a. Cash receipts journal with money columns for cash, accounts receiv- 
able, sales discount, and general ledger. 



466 COST FINDING FOR ENGINEERS 

b. Cash disbursements journal with money columns for cash, accounts 
payable, purchase discount, and general ledger. 

c. Sales journal with money columns for accounts receivable, and 
sales. 

d. Purchase journal with money columns for accounts payable, and 
purchases. 

e. General journal with both debit and credit money columns for 
accounts receivable, accounts payable, and general ledger. 

/. General ledger, using control accounts for accounts payable, and 
accounts receivable. 

2. Make the postings to the general ledger accounts. 

3. Make the postings to the subsidiary ledger accounts. 

4. Prepare a trial balance. 

5. Prove the balances in the control accounts, accounts receivable, and 
accounts payable. 

19 

June 1. R. R. Banks entered the electrical contracting business, 
investing $8,000 cash which he deposited in the Forbes 
National Bank. He also turned over to the business an 
auto truck valued at $500. 

2. Materials were purchased on account from Zig Zag Electric 
Company, $3,856.50, terms, 1/10 n/30, and from Le 
Barthe Supply House, $4,855.19, terms, 2/10 n/30. 

3. Paid rent for month to J. G. Owens, $75.00. 

5. Sold merchandise on account to Wagner and Carey, $895.40; 
Steinway Electric Company, $2,168.75, terms, 2/10 n/30. 

11. Sent check to Zig Zag Electric Company for $2,000, less 
discount. 

15. Received check from Steinway Electric Company for $1,600, 
less discount. 

20. Purchased merchandise on account from Wagner and Carey, 
$500, 1/10 n/30. 

25. Wagner and Carey returned goods for which a credit memo- 
randum for $50 was sent to them. 

29. Settled the balance in the creditor's account, Wagner arid 
Carey, by offsetting it against the customer's account with 
the same firm. 

30. Sent Le Barthe Supply House a 30 day 6 per cent note dated 
June 30 for $4,000. 

16-126. Enter the following transactions in the following books of 
original entry. Post the journal entries to ledger accounts, and prepare 
a trial balance. The books of original entry to be used are: 

1. Cash Receipts Date; Account; Folio; General Ledger; Account 
Receivable; and Cash. 

2. Check Register Date; Account; Voucher Number; Check Num- 
ber; Account Payable; Purchase Discount; and Cash. 

3. General Journal General ledger; Folio; Account and Explanation; 
and General Ledger. 

4. Voucher Register Date; Explanation; Voucher Number; Paid: 
Date, Check Number; Accounts Payable; Development Cost: Lease No. 



PROBLEMS 467 

1, Lease No. 2, Lease No. 3; Indirect Labor; Sundry: Debit, Credit, 
Polio, and Account. 
19 

Apr. 1. E. B. Yellig, C. G. Senkel, and G. B. Brown form a partner- 
ship under the name of the Keystone Oil Company for the 
purpose of producing crude oil. The investments of the 
partners were as follows: 

Yellig: Cash $100,000 

Senkel: Cash 25,000 

U. S. Government Bonds at market value 25 , 000 

Brown: Cash 25,000 

Drilling Tools 19,000 

Rigs and Derricks 20 , 000 

Engines, Pumps, and Boilers 30,000 

Trucks 6,000 

Apr. 2. A lease was obtained from each of the following parties on 
the seven-eighths working interest basis : 
Jerry Youngwell, Knute Monroe, and Harry Jenkins. 
The legal fees involved in obtaining the leases, amounting to 
$500 each, were paid in cash to Jas. C. Reed. (Development 
Cost, Leaseholds Nos. 1, 2, and 3.) 

3. Received 9,000 feet of tubing and casing from the Oil Well 
Supply Company, on account, $45,000, n/30. (Development 
Cost, charged equally to Leases Nos. 1, 2, and 3.) 

5. Paid city office rent for month to Peoples Trust Company, 
$200. 

7. Purchased and received 4,800 feet of pipe for use on the lease- 
holds, from National Tube Company, on account $480, n/30. 
(Development Cost, equal charges to Leases Nos. 1, 2, and 3.) 

8. Purchased lumber for use on the leaseholds from J. A. Ripple, 
on account, $600, n/30. Development Cost, equally to 
Leases Nos. 1, 2, and 3.) 

10. Purchased miscellaneous hardware from the Gem Hardware 
Company on account, $120, n/30. (Development Cost, 
equally to Leases Nos. 1, 2, and 3.) 

12. Obtained options on five new leases, paying $200 cash to 
each of the following land owners: Milt Flack, Harry Moore, 
Ezra Knobel, Judd Kent, and Nancy Dole. 

15. Purchased 6 tons of coal equally divided for use on Leases 
Nos. 1, 2, and 3 from Acme Coal Company, $18, n/30. 
(Development Cost.) 

16. Payroll for the first half of the month paid as follows: 

Labor (equally on Leases Nos. 1, 2, and 3) $3,600 

Superintendent 200 

Truck drivers 150 

Geologists and engineers 1 ,000 

Office clerks and timekeeper 500 



468 COST FINDING FOR ENGINEERS 

17. Purchased drilling tools and equipment from the Drake Oil 

Well Supply Company, on account, $30,000, 2/10 n/30. 
19. Purchased miscellaneous supplies, for use in drilling wells on 

Leases Nos. 1, 2, and 3, from Oil Well Supply Company on 

account, $300, n/30. 
22. Purchased and received three storage tanks from Federal 

Tank Company, on account, $3,000, n/30. (Development 

Cost, equally to Leases Nos. 1, 2, and 3.) 
24. Purchased and received shipment of valves, fittings, and 

other supplies from Crane and Company on account, $654, 

n/30. (Development Cost, equally to Leases Nos. 1, 2, and 

3.) 

26. Received a bill from the Ridge Tool Service Company for bit 
sharpening, $330. (Development Cost, equally to Leases 
Nos. 1, 2, and 3.) 

27. Paid invoice of Apr. 17 to Drake Oil Well Supply Company 
less discount. 

28. Received a bill from Sun Oil Company for 100 gallons gasoline 
used by the trucks and 20 gallons motor oil, $20, on account, 
2/10 n/30. 

29. The derricks used in drilling operations on Leasehold Nos. 1, 
2 t and 3, were taken from the supply contributed by Mr. 
Brown, which were considered to have a value of $1,500 each. 

30. Paid cash, $38, to H. Hines Company for office supplies 
previously received during the month. Payroll for the last 
half of the month paid as follows: 

Labor (equally on Leases Nos. 1, 2, and 3) $5,400 

Superintendent 200 

Truck drivers. 150 

Geologists and engineers 1 ,000 

Office clerks and timekeeper 600 

16-126. G. C. Barnes and R. P. Knight are owners of a wholesale 
accessory supplies and radio business. The partners use the following 
books in their accounting system: 

1. Sales Journal Date; Account and Explanation; Folio; Accounts 
Receivable; Accessory Sales; and Radio Sales; Miscellaneous Sales. 

2. Voucher Register Date; Payable to; Voucher Number; Paid: Date, 
Check Number; Accounts Payable; Accessory Purchases; Radio Pur- 
chases; Wages; Sundry: Debit, Credit, Folio, and Account. 

3. Cash Receipts Journal Date; Account and Explanation; Folio; 
Cash; Sales Discount; Accounts Receivable; and General Ledger. 

4. Check Register Date; Paid to; Check Number; Voucher Num- 
ber; Cash; Purchase Discount; and Accounts Payable. 

5. General Journal Accounts Payable; Accounts Receivable; General 
Ledger; Folio; Account and Explanation; General Ledger; Accounts 
Receivable; and Accounts Payable. 

6. The general ledger contains the accounts as listed below with bal- 
ances as shown by a proof trial balance prepared on June 30, 19 : 



PROBLEMS 469 

Inventory accessories $47,000.00 

Inventory, radios 14,000 . 00 

Cash 3,680.00 

Accounts Receivable (Control) 8,040 . 00 

Accrued Interest on Notes Receivable 

Delivery Truck 800 . 00 

Store Furniture and Fixtures 1 , 600 . 00 

Office Equipment 1 ,000 . 00 

Accounts Payable (Control) 4,800.00 

Accrued Wages 200 . 00 

Accrued Interest on Notes and Mortgage Pay- 
able 

Mortgage Payable 10,000 . 00 

Wages 

Reserve for Doubtful Accounts 

Traveling Expenses Accrued 

Notes Payable 6,000.00 

G. C. Barnes, Capital 33,520.00 

R. P. Knight, Capital 20,000.00 

Reserve for Depreciation, Truck 600.00 

Reserve for Depreciation, Store Furniture and 

Fixtures 800.00 

Reserve for Depreciation, Office Equipment 200.00 

Notes Receivable 

Delivery Truck Expense 

Sales Returns and Allowances, Accessories 

Purchase Returns and Allowances 

Allowance on Delivery Truck 

Loss on Sale of Delivery Truck 

Miscellaneous Sales 

Interest Earned 

Salesmen's Traveling Expense 

Rent 

Sales Discount 

Purchase Discount 

Purchases, Radios 

Purchases, Accessories 

Sales, Accessories 

Sales, Radios 

Depreciation, Store Furniture and Fixtures 

Depreciation, Office Equipment 

Depreciation, Truck 

Doubtful Accounts 

Interest Expense 

7. The accounts receivable ledger contains accounts with the following 
balances: 

R. E. Cantor $2,000.00 

C. A. Call 850.60 



470 COST FINDING FOR ENGINEERS 

P. M. Powers 650.00 

E. A. Normandie 1 ,351 . 50 

Joe Chandler 1, 160.00 

Radio Supply House 335.00 

McMasters & Mates 1 , 125 . 00 

J. E. Burgess 568.00 

W. H. McDonell and Company 

8. The balance in Accounts Payable control account represents amounts 
owed to the following creditors: 

Voucher No. 

600 Shandler Auto Supply Company $1 , 844 . 42 

601 W. M. Shafer Distributing Company 1 , 688 . 84 

602 W. H. McDonell and Company 1,266.74 

$4,800.00 

Enter the amounts owed to the creditors in the accounts payable 
column only of the voucher register, and rule a double line under the 
total. Do not include the total in the summary posting to the control 
account. These amounts represent balances owed prior to July 1, and 
are not transactions for the month of July. These three items are shown 
in the voucher register in order to have a record of the date they are paid. 

Instructions 

1. Open accounts in the general ledger and accounts receivable ledger, 
using the names of accounts given above, and allow ten spaces for entries 
under the caption of each account. 

2. Enter in each account, for which a balance is shown, the amount 
under the date of July 1, 19 , and set up the proof trial balance. 

3. Journalize the following transactions in proper books of original 
entry. Number July vouchers beginning with 700. 

4. Summarize the various journals on July 31 and make the summary 
postings. 

5. Post all current transactions immediately upon making the entries. 

6. Prepare the adjusting entries and post them to the ledger except 
for the closing inventory adjustment. 

7. Prepare lists of both accounts receivable and accounts payable, 
and prove the totals with their respective control account balances in 
the general ledger on July 31. 

8. Prepare a trial balance on July 31, 19 , after considering all 
adjustments. 

9. Prepare a work sheet. 

10. Profits or losses from operations are divided equally between the 
partners according to agreement. 

Transactions 

19 

July 1. Sale of accessories on account to C. A. Call, $1,555.00; Joe 

Chandler, $133.00; and J. E. Burgess, $45.70. 
3. Received on account from R, E. Cantor, cash, $1,000 and his 

30-day 6 per cent note date July 3, for balance of account. 



PROBLEMS 471 

5. Received bill from Booth Garage for gas and oil for the 
delivery truck, $60.00 which was paid this date. Paid 
Shandler Auto Supply Company less 1 per cent discount. 
Sales to P. M. Powers, on account, $1,593.60: accessories, 
$1,233.20, radios, $360.40. 

8. Joe Chandler returns accessories for which we allow him a 
credit of $88.24. 

10. Sales to Me Masters & Mates on account, $1,824: accessories, 
$1,600.50, radios, $223.50. Sales to E. A. Normandie on 
account, $313.30: accessories, $150.00, radios, $163.30. 

12. C. A. Call paid $850.50, less 2 per cent discount. 

15. Purchased radios on account from Philco Sale Company, 
$1,901.00. 

16. Paid rent of $200.00 to Wm. L. Bush Real Estate Company. 
18. Paid wages for two weeks ending today, $624.00, $200.00 of 

which was accrued on July 1. Received check from Radio 
Supply House for $353.00. Sales to E. A. Normandie on 
account, radios, $510.40. 

20. Purchased radios on account from W. M. Shafer Distributing 
Company, $1,120.80. 

Purchased accessories on account from W. H. McDonell and 
Company, $3,380.80. 

Sent a check to Radio Supply House for $18.00, which repre- 
sents an overpayment of their account on the 18th. Gave 
W. M. Shafer Distributing Company a check for amount 
owed on July 1, $888.84, and settled the balance by a 30-day 
6 per cent note date July 20th. 

22. W. H. McDonell and Company buys a quantity of radio sup- 
plies, $670.20, 2/10 n/30. 

Purchased an adding machine from Rand Company, $286.60, 
1/10 n/30. 

Me Masters & Mates paid their balance of July 1, less 2 per 
cent discount. 
Paid wages, $460.00. 

25. Received a check from E. A. Normandie, $1,351.50. 

27. Sold radio supplies to R. E. Cantor on account, $90.90. 
Also sold him one lot of old boxes for $18.40 on account. 

29. Paid Rand Company bill of July 22 less discount. Purchased 
accessories on account from Shandler Auto Supply Company, 
$3,000. 

30. W. H. McDonell and Company balance of July 1, $1,266.74, 
is paid, less amount of bill of goods sold them on July 22. 
Both bills are subject to a discount of 2 per cent before pay- 
ment. (Cancel voucher 602 and make a new one for amount 
of payment.) 

31. A new delivery truck is purchased from International Auto 
Sales costing $1,050.00. They allowed $150 on the old truck. 
Charge off the depreciation for one month ($16.66) on old truck 
before determining gain or loss on the disposal of the old truck. 
Sold scrap rubber for cash, $25.00. 



472 



COST FINDING FOR ENGINEERS 



Adjustments, July 31, 19* 

a. Wages accrued $172.00 

6. Salesmen's traveling expense accrued 151 . 80 

c. Collection of interest by bank for the firm is reported by 

the bank. 7. 16 

d. Doubtful accounts to be charged off, % of 1 per cent of 
charge sales. 

e. Interest on notes receivable accrued 4 . 66 

/. Interest on notes payable accrued 2 . 66 

g. Interest on mortgage payable accrued 50.00 

A. Depreciation on store furniture and fixtures, 10 per cent per annum. 
i. Depreciation on office equipment (depreciate new adding machine 

for a full month) 10 per cent per annum. 
j. Inventory of accessories, $49,4,99.90; radios and supplies, $16,720.10. 

The figures for the inventory adjustments are to be used in the 

work sheet only. Make no adjusting entries for inventories at 

July 31. 

16-127. Make the postings from the following journals to the general 
ledger accounts and prepare a trial balance: 

Voucher Register 





Accounts 
Payable 


Purchase 
Discount 


Stores 


General 
Ledger 


Auto Trucks 


$29,750 


$250 


$25,000 


$5,000 











Check Register 





Accounts 
Payable 


Cash 






$17,820 


$17,820 





Factory Journal 





Work in 
Process 


Overhead 
Expense 


Stores 






$15,000 


$1,500 


$16,500 











16-128. Make the postings from the following journals to the general 
ledger accounts and prepare a trial balance. 



PROBLEMS 
Cash Receipts Journal 



473 





Cash 


Sales 
Discount 


Accounts 
Receivable 


General 
Ledger 




$13,882 


$60 


$5,942 




V. M. Fields, Capital 








$8,000 











Sales Journal 





Accounts 
Receivable 


Sales 
Refrigerators 


Sales 
Radios 






$15,945 


$6,431 


$9,514 











Voucher Register 





Accounts 
Payable 


Stores 
Inventory 


Pay- 
roll 


Factory 
O.H. 
Expense 


Marketing 
Expense 


Admin. 
Expense 


General 
Ledger 


Machinery 


$36,345 


$14,300 


$8,000 


$3,000 


$5,000 


$2,000 


$4,045 

















Check Register 





Accounts 
Payable 


Purchase 
Discount 


Cash 






$8,281 


$57 


$8,224 











General Journal 



Accounts 
Payable 


General 
Ledger 


L. 
F. 




General 
Ledger 


Accounts 
Receiv- 
able 




$ 100 




Sales Allowances 












M. Cole 




$ 100 


$10,000 






A. C. Corbett 












Notes Payable 


$10,000 






$3,000 




Notes Receivable 












Jones Electric Company 




$3,000 


$10,000 


$3,100 






$10,000 


$3,100 













474 



COST FINDING FOR ENGINEERS 



16-129. Make the postings from the following journals to the general 
ledger accounts and prepare a trial balance : 



Cash Receipts Journal 





Cash 


Sales 
Discount 


Accounts 
Receivable 


General 
Ledger 


R. M. Powell, Capital 








$10,000 


Totals 


$12,772 


$28 


$2,800 


$10,000 













Cash Disbursements Journal 





Cash 


Purchase 
Discount 


Accounts 
Payable 


Totals 


$5,130 


$30 


$5,160 











Sales Journal 





Accounts 
Receivable 


Sales 
Machine Tools 


Sales 
Small Tools 


Totals 


$11,630 


$3,485 


$8,145 











Voucher Register 



Accounts 
Payable 


Purchases 
Machine 
Tools 


Purchases 
Small 
Tools 


Store 
Supplies 


Adver- 
tising 


Wages 


Sundry 


Amount 


L. 
F. 


Account 














$ 100 




Rent 














1,400 




Auto Truck 














15 




Office 


















Supplies 


$20,583 


$6,250 


$13,136 


$50 


$37 


$595 


$1,515 

























PROBLEMS 
General Journal 



475 



Accounts 
Payable 


General 
Ledger 


' 


L. 
F. 


General 
Ledger 


Accounts 
Receiv- 
able 


$8,160 




General Electric Company 












Notes Payable 




$8,160 






$3,773 


Notes Receivable 












J. M. Thompson 






$3,773 




76 


Sales Returns and Allowances 












Shaller and Webb 






76 


$8,160 


$3,849 






$8,160 


$3,849 













16-130. 1. From the five journals make all current and summary 
postings to the general ledger and to the accounts receivable ledger. 

2. Prove the balance in the accounts receivable and in the accounts 
payable control accounts in the general ledger. 

3. Prepare a trial balance of the general ledger. 

4. Prepare a work sheet, using the following adjustments: 

a. Inventory $13,000.00 

6. Estimated Taxes 15 .95 

c. Depreciation on Office Equipment 2 . 50 

d. Estimated Loss on Customers' Accounts. . . 31 .98 

5. Prepare the following statements: 

a. Statement of income, profit and loss. 

6. Statement of ownership. 
c. Balance sheet. 

The following transactions were recorded in the books of the Penn Paint 
Company: 



Cash Receipts Journal 



Rl 



19 




L. 
F. 


Cash 


Sales 
Dis- 
count 


Accounts 
Receiv- 
able 


General 
Ledger 


May 1 
23 
31 


P. I. Penn, Capital 
H. Clayton <fe Co. 
Cohee & Co. 




$ 8,000.00 
3,726.78 
2,155.19 


$37.64 
21.77 


$3,764.42 
2,176.96 


$8,000.00 


$13,881,97 


$59.41 


$5,941.38 


$8,000.00 















476 



COST FINDING FOR ENGINEERS 



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478 



COST FINDING FOR ENGINEERS 
Check Register 



D2 













Pur- 




19 




Voucher 
Number 


Check 
Number 


Accounts 
Payable 


chase 
Dis- 


Cash 












count 




May 1 


Mack Trust Co. 






$ 150.00 




$ 150.00 


4 


American Express Co. 






8.65 




8.65 


15 


Bascom & Co. 






6,742.28 


$57.42 


5,684.86 


18 


Bell Telephone Co. 






15.80 




15.80 


20 


Postal Telegraph Co. 






19.65 




19.65 


30 


Standard Typewriter Co. 






120.00 




120.00 


31 


Payroll 






2,225.00 




2,225.00 










$8,281.38 


$57 . 42 


$8,223.96 











Sales Journal 



S3 



19 




L. 

F. 


Accounts 
Receivable 


Sales 


May 13 


H. Clayton & Co. 




$ 3,856.92 


$ 3,856.92 


17 


Fowler & Hoke 




3,993.79 


3,993.79 


21 


Cohee & Co. 




2,176.96 


2,176.96 


30 


Sullivan & Sons 




4,294.40 


4,294.40 


31 


DuBarry & Mara 




1,623.16 


1,623.16 








$15,945.23 


$15,945.23 











Chapter XVII 

17-131. Record the following transactions in the following books of 
original entry: 

a. Voucher register with columns for date; payable to; voucher num- 
ber; paid: date, check number; accounts payable; purchase discount; 
stores; sundry: debit, credit, folio, and account. 

6. Check register with columns for date; paid to; check number; 
voucher number; and cash. 

c. General journal with columns for debits: accounts receivable, 
accounts payable, general ledger; folio; date and explanation; credits: 
general ledger, accounts payable, and accounts receivable. 
19 

Dec. 1. Received an invoice from the Franklin Supply Company for 
20,000 No. 754-B castings which were unloaded today. 
Invoice amount, $16,953.66, 2/10 n/30. 

2. Invoices from State Supply Company were checked with 
receiving slips and approved for voucher: 20 barrels lubricat- 
ing oil, $1,000; 10 barrels cutting compound, $400; 8 bales of 
waste, $620; terms, 2/10 n/30. A credit memorandum for 



PROBLEMS 479 

$185 was also taken into consideration when these invoices 
were vouchered. 

3. Received 20,000 K by 4 in. machine bolts from the Better 
Bolt Company, $937, 1/10 n/30. 

4. Received 1,000 kegs of cut washers from the Pittsburgh 
Washer and Nut Corporation, $8,000, 1/10 n/30. 

5. Received a carload No. 1 common yellow pine lumber, 1 in. 
by 12 in. by 16 ft., containing 18,544 board feet at $130 
M feet, 2/10 n/30. Invoice from Rutter Brothers Lumber 
Company. 

12. Paid the State Supply Company in full. 

14. Paid one-half of the amount owed to Pittsburgh Washer and 

Nut Corporation. 

20. Failed to pay the Better Bolt Company in time to take dis- 
count. Make proper adjustment, considering payment not 
made at this date. 

25. Returned 2,540 board feet lumber to Rutter Brothers Lum- 
ber Company for which they allowed credit at the purchase 
price. We also paid freight of $47.10 to*P. & L. E. R. R. on 
the lumber returned which was deducted from the voucher 
that was paid today to the Rutter Company. 
30. Gave Franklin Supply Company a 60-day 6 per cent note in 

settlement of account. 

Present the Accounts Payable control account fully posted, and prove 
the balance shown therein. Also present the Purchase Discount account 
fully posted with the balance shown. 

17-132. Record the following transactions in the following three books 
of original entry: 

a. Voucher register with columns for date; payable to; voucher num- 
ber; paid: date, check number; accounts payable; purchase discount; 
stores; sundry: debit, credit, folio, and account. 

6. Check register with columns for date; paid to; check number; 
voucher number; and cash. 

c. General journal with columns for debits: accounts receivable, 
accounts payable, general ledger; folio; date and explanation; credits: 
general ledger, accounts payable, and accounts receivable. 
19 

Jan. 1. Received machinery from the American Machinery Company, 
costing $10,000, 2/10 n/30. Freight on the machinery 
amounting to $160 was paid to the P. & L. E. R. R. 
2. Created a petty cash fund of $400. 

6. Purchased and received a truck from the International 
Agency, the purchase price being $2,400. Paid $400 cash, 
and gave a 60-day 6 per cent note dated today for the balance. 

8. Received raw materials from the Stewart Manufacturing 
Company, invoice being for $1,900, 1/10 n/30. 

9. Paid factory payroll, $1700.40. 

11. Paid the invoice of American Machinery Company, taking 
the discount. 



480 COST FINDING FOR ENGINEERS 

12. Some of the goods purchased from the Stewart Manufacturing 
Company were damaged. The goods were returned and a 
credit memorandum was received for $150. 

14. Raw material was received from the Troy Manufacturing 
Company, invoiced at $1,600, 2/10 n/30. 

15. Received a bill from the Standard Garage for repairs to auto 
truck and for gasoline amounting to $120. 

18. Supplies for use in the factory were received from the Des 
Moines Supply House, amounting to $140, n/30. 

19. Paid one-half of the amount owed to Troy Manufacturing 
Company. Discount was deducted on the amount paid, and 
the balance was to be paid in 30 days. 

22. Paid the Standard Garage invoice of the 15th. 

26. Paid the Des Moines Supply House. 

30. Paid off the note which was given to the International Agency 

thus saving interest for balance of the 60 days. 

Total the columns of each of the journals and make the postings to the 
Accounts Payable control account. Show the proof of the balance in this 
control account. 

17-133. The Peoria Furniture Company uses, among others, the 
following books in their accounting department: 

1. Voucher register Date; Voucher Number; Account and Explana- 
tion; Payment: Date and Check. Number; Accounts Payable; Materials; 
Manufacturing; Marketing; Administrative; Sundry Debit; Sundry 
Credit; Ledger Folio; Account. 

2. Voucher distribution sheets Provide a separate distribution sheet 
for each control column in the Voucher Register. 

3. Check register Date; Ledger Folio; Account and Explanation; 
Check Number; Voucher Number; Accounts Payable; Purchase Dis- 
count; Cash. 

4. General journal Accounts Payable; General Ledger; Ledger Folio; 
Account and Explanation; General Ledger; Accounts Payable. 

5. General ledger. 

The transactions occurring during the month of Mar., 19 , are shown 
below. Journalize the transactions, make current postings and summary 
postings to the general ledger and the voucher distribution sheet, and 
take a trial balance as of Mar. 31, 19 . Prove the balance in each of 
the control accounts. 
19 

Mar. 1. Purchased 10 tons of coke at $8.50 per ton from the Iron 
City Fuel Company. One-half of the bill was paid immedi- 
ately, the remainder to be paid in 30 days. 

2. Received lumber from the Minnesota Cooperative Camp 
for $750. Terms, 10 days. Paid freight on the shipment, 
$88, to the A. T. & S. F. R. R. 

3. Received 100 gallons of glue, $125, from the Minneapolis 
Furniture Supply House, terms, 2/5 n/20. 

Paid taxes on factory property to the City of Peoria, 
$1,488. On Dec. 31, estimated taxes of $1,500 had been 



PROBLEMS 481 

set up in a Reserve for Taxes account. The actual assess- 
ment was $1,550 from which 4 per cent discount was deducted 
for payment in advance of due date. 

5. New belting for machinery costing $48 was purchased from 
the Everlasting Leather Company. The bill was paid in cash. 

6. New machinery costing $2,850 was purchased from the 
Murray Iron Works in Burlington, Iowa. A 20-day 6 per 
cent time draft was accepted, which was sent to the Second 
National Bank in Peoria. A copy of the bill of lading was 
received. 

7. Returned lumber valued at $140 to the Minnesota Coopera- 
tive Camp. 

Furniture Age sent a bill for advertising in March issue, $75. 
Shellac, varnish, etc., costing $220 were received from the 
World Paint Company today. 

Paid shipping charges, on shipment of varnish, to C. & A. R. 
R., $18. 

8. Received invoice from the World Paint Company. Terms, 
2/10 n/30. Sent a check to the Minneapolis Furniture 
Supply House in full of account. 

10. Sent a check for $93 to Ivor Wilson, a salesman, to cover 
expenses of $29, as per statement rendered, and special 
commissions for the last week amounting to $64. 

12. Sent a check to Minnesota Cooperative Camp in full of 
account. 

13. Received miscellaneous factory supplies from Nurre and 
Company, $45. Terms, n/30. 

14. Sent a check to the Iron City Fuel Company for $25. 

15. Reimbursed petty cash with a check for $77.50. Postings 
have been made from the petty cash book. 

16. Traded in an old truck costing $1,200 and having a book 
value of $350 on a new one costing $950. The trade-in 
allowance .was $275. The balance was paid by check to the 
Automotive Truck Company. 

19. Received lumber costing $1,858 from the Birmingham Pine 
Lumber Mills. A 60-day 6 per cent note was given for the 
full amount of the invoice received today. Freight paid to 
the C. & A. R. R. on the shipment was $379. 

21. Sent a check to O. R. Lowell for $28. This was for an 
allowance made on furniture we sold him which arrived in a 
damaged condition. 

23. Reimbursed A. G. Wilson, vice-president of the firm, for 
expenses incurred while attending the showing of the Furni- 
ture Mart in Chicago. The amount was $52. 

24. Received a shipment of mirrors from the Pittsburgh Glass 
Company to be used in various types of furniture. Amount 
of the invoice was $875, terms, 5 per cent discount on any 
cash payment, 30 days net. $475 of the invoice was paid 
by cash, less the discount applicable thereto. 



482 COST FINDING FOR ENGINEERS 

26. Sent a check to the Murray Iron Works in full payment of 
note and interest due today. 

27. Received notice from the Commercial State Bank that 
$4.85 has been deducted from our checking account in pay- 
ment for collection charges. 

31. Payroll for March is as follows: 

Direct labor $1 ,869 

Indirect labor 182 

Office salaries 320 

Officers' salaries 1 ,250 

Salesmen's salaries 280 

Received a bill from Bell Telephone Company for service for 
March, $26.85. 

The Midwest Power Company rendered a bill for power con- 
sumed, $143.40. 

NOTE: Materials should include lumber, mirrors, paint and varnish 
only. 

17-134. a. Record the transactions listed below in the voucher 
register of the Marmon Machine Company which contains the following 
columns: Date; Payable To; Voucher Number; Paid: Date, Check Num- 
ber; Accounts Payable; Manufacturing Cost; Marketing Expense; 
Administrative Expense; Sundry: Debit amount, Credit amount, Folio, 
and Account. 

6. Make a distribution of vouchers in the voucher summary sheet 
having the following accounts : 

Marketing 

Manufacturing Cost Expense Administrative Expense 
Raw Material Advertising Office Salaries 
Direct Labor Salesmen's Salaries Office Supplies 
Indirect Labor Delivery Expense Telephone and Tele- 
Freight In Traveling Expense graph 
Factory Supplies Freight Out Officers' Salaries 
Misc. Factory Expense Repairs to Truck Dues & Subscriptions 
Light and Power 

c. Make postings frdm summary sheet to operating ledger on July 31> 
19. 

d. Make postings from voucher register to general ledger. 

e. Show the proof of all control account balances. 
/. Prepare a trial balance. 

Voucher 
19 No. 
July 2. 700 Georgia Chemical Company, 2/10 n/30, one barrel of 

compound, $105. 

5. 701 American Express Company, express charges on merchan- 
dise shipped to customers, $29.52. 



PROBLEMS 483 

5. 702 Office Supply Company, net 30 days, carbon paper and 

office supplies, $51.76. 

6. 703 Pitt Office Equipment Company, net 30 days, one adding 

machine, $518. 

7. 704 100,000 pounds of j^-inch steel plate from U. S. Steel 

Corporation, 1/10 n/30, $10,000. 

7. 705 Freight bill from P. R. R. Company on carload of steel 
plates, $714.36. 

11. 706 Forged Steel Rivet Corporation, 10,000 pounds rivets, 

1/10 n/30, $2,000. 

12. 707 H. B. South Printing Company, 10,000 time cards, net 

30 days, $50. 

18. 708 Chevrolet Garage, repair bill for truck, net 30 days, 

$294.40. 

19. 709 Globe Valve Company, brass valves, 2/10 n/30, 

invoice $1,894.50, with freight allowance of $124.40. 

20. 710 Payroll for first two weeks 

Direct Labor $7,894. 10 

Indirect Labor 853 . 50 

Salesmen's Salaries 2,400 .00 

Office Salaries 1,120.00 

Officers' Salaries 2,000.00 

21. 711 The Steel Age rendered bill for 1 year's subscription to 

trade magazine, $4.50. 
23. 712 Ensign Advertising Company, Advertising space, $432.40 

net. 
23. 713 Salesmen's traveling expense, July 1 to 15, $450.00 (check 

drawn in favor of cashier). 

30. 714 Pittsburgh Coal Company, one ton of coke, $37.50. 

31. 715 Bell Telephone Company, service for July, $36.90. 
31. 716 West Penn Power Company, power for July, $216.22. 
31. 717 Western Union Telegraph Company, $18.66. 

31. 718 Kokomo Rod Mill, $2,500, 1/10 n/30, bar iron and 

steel. 

31. 719 Gulf Refining Company, 500 gallons of gas for truck, $85* 
31. 720 Payroll for last two weeks in July 

Direct Labor $7,539.80 

Indirect Labor 802 .20 

Salesmen's Salaries 2,400.00 

Office Salaries 1 3 100.00 

Officers' Salaries 2,000.00 

31. 721 Lincoln Machine Company, one lathe, $5,500, 1/10 n/30. 

17-135. Record the following transactions in a voucher register with a 
purchase discount column, and in a check register as the occasion requires: 

a. Received an extractor from the American Laundry Machinery 
Company. Invoice amount, $1,531.00, 2/10 n/30. Freight paid on 
the extractor to the Pennsylvania R. R. amounted to $34.40. 



484 COST FINDING FOR ENGINEERS 

b. A credit memo, $276.40 was received from Brown Brothers for raw 
materials damaged in transit some months ago. Two invoices not 
affected by the above credit, were vouchered for payment today to the 
same firm. The invoices totaled $2,944.36, less 1 per cent discount, 
which together with the credit was deducted from the total amount pay- 
able for raw materials. 

c. Payment of a voucher previously entered in voucher register made 
in favor of Larson Brothers for $3,920 with an $80 discount deduction, 
was delayed and the discount was lost. Prepare a voucher for payment 
of the full amount of the invoice, payment being made today. 

d. An invoice for $4,713.80, 1/10 n/30 from Hartman Company for 
factory supplies received, had been previously entered in the voucher 
register. Payment of one-half of the amount is made today, which is 
within the discount period, and the balance is to be paid in 30 days. 

Chapter XVIII 

18-136. Select the product of some industry and trace its development 
through its successive stages of raw materials, work in process, and 
finished goods from both the technical and accounting viewpoints. 

18-137. List 20 manufacturing overhead expense items and state which 
are variable and which are non-variable. 

Chapter XIX 

19-138. State how the shortage of stores inevitably occurs despite the 
careful checking of all materials into and out of the storeroom. This 
shortage may be accounted for in what manner? Show the necessary 
entries. 

19-139. a. Outline a plan for taking a physical inventory that will 
insure the valuation being as accurate as it is possible to make it. 

b. If the book value of the perpetual inventory does not agree with 
the physical inventory value, how is the variance reconciled? 

c. Show the entries to be made if the book value is greater than the 
physical inventory value; if the book value is less than the physical 
inventory value. 

19-140. The first in, first out method of pricing the inventory of bags 
of cement was in operation in a construction concern. The stock record 
showed the following information from which you are to compute the 
inventory of cement on Dec. 31, 19 . 

Received Issued 

July 640 bags at .55 per bag 450 bags 

August 500 bags at .58 per bag 510 bags 

September 330 bags at .61 per bag 385 bags 

October 490 bags at .60 per bag 420 bags 

November 240 bags at .63 per bag 275 bags 

December 275 bags at .65 per bag 194 bags 

19-141. The Greater Aluminum Company maintained a modern store- 
room in which all supplies were kept. All materials were under the 



PROBLEMS 485 

supervision of a general storekeeper whose employees carefully checked 
in and out every item. A careful record was kept of all prices on goods 
received and issued. 
The following record appears on the stock card for aluminum ingots. 

Received Issued 



Jan. 1. Balance on Hand: Jan. 10. 1,800 pounds 

4 , 300 pounds @ $ . 205 23. 1 , 300 pounds 

Feb. 2. 2, 800 pounds @ .2075 Feb. 8. 1 , 200 pounds 

27. 3, 300 pounds .206 15. 1,000 pounds 

Mar. 5. 3,800 pounds @ .20875 Mar. 7. 2,000 pounds 

21. 3,500 pounds @ .2062 17. 2,500 pounds 

Apr. 8. 2, 900 pounds @ .1975 Apr. 10. 2 , 400 pounds 

24. 2, 600 pounds 

May 3. 4 ,200 pounds @ .20 May 7. 2 , 300 pounds 

27. 2,400 pounds 

June 1. 5, 000 pounds .205 June 2. 3, 500 pounds 

18. 2, 000 pounds 

July 7. 5, 100 pounds @ .21 July 15. 3 , 800 pounds 

17. 3, 500 pounds .215 22. 3, 100 pounds 

Aug. 10. 6, 300 pounds @ .2175 Aug. 17. 6, 000 pounds 

21. 4,100 pounds @ .216 

Use the moving average method of pricing to establish the value of the 
aluminum to be shown on the perpetual inventory record at the end of 
each month, and at August 21. Also show in your record the quantities 
received and issued, and the quantity on hand at the end of each month. 
Carry the unit price to the fifth adjusted decimal. 

19-142. The Stainless Steel Corporation had the following items in 
their inventory on Dec. 31, 19 . At what value should the inventory 
be shown: 

1. In the statement of income, profit and loss? 

2. In the balance sheet? 

1,000 tons of plates at $40 a ton cost, $37 a ton market value, and $50 a 
ton selling price. 

1,500 tons of shapes at $45 a ton cost, $50 a ton market value, and 
$60 a ton selling price. 

19-143. Show how a control would be established over raw materials 
if the following transactions took place in a manufacturing concern. 
19 

Sept. 1. Purchased from the Best Coke Company 10 tons of coke 
(stock item 744) at $4. 50 a ton : Terms, 1 / 10 n /30. Freight 
to the Safeway R. R. Company amounted to $15.00. 
3. The Johnston Coal and Coke Company delivered 100 bushels 
of charcoal (stock item 7,331) at 12 cents per bushel. Terms, 
n/30. 

8. The Conda Copper Company sent, as ordered, 5,000 pounds 
of copper at $.09H P er pound (stock item 765). Freight of 
$75.00 was paid to the Western R. R. 



486 COST FINDING FOR ENGINEERS 

14. Received from the London Company 4,000 pounds of 70-30 
brass scrap at $.06 per pound (item 776) and 750 pounds of 
zinc at $.05 per pound (stock item 773). 

16. The Founders Sand Company sent their invoice of $26.50 for 
foundry sand. We received the ten bbls. this afternoon. 

19. 750 pounds of copper was issued for job C-4,321. 

21. Requisitions for 50 bushels of charcoal (item 7,331), 6 tons 
of coke (item 744), and 2,500 pounds of 70-30 brass scrap 
(item 776) were received. Equal charges were made to jobs 
C-4,321, K-832, and L-3,144. 

22. Received requisitions for 500 pounds of zinc and 6 barrels of 
foundry sand. Charges were made equally to jobs C-4,321 
and K-832. 

25. Received 70 gals, of molasses from the Mill Supply Com- 
pany at $.65 per gal. (item 7,113). 

26. Issued 4 gals, of molasses (item 7,113) for job C-4,321 and 1 
gal. for job K-832. 

27. Requisition made for 1,500 pounds of copper for job S-93. 
Show proof of balance in stores control account. 



Chapter XX 

20-144. Record the following transactions of a gasoline pump manu- 
facturing concern in the proper columnar journals, and other records in 
use as follows: 

1. Voucher register with control columns for stores inventory, manu- 
facturing cost, marketing expense, and administrative expense. 

2. Voucher distribution sheet. 

3. Check register. 

4. Journal vouchers. 

Make all the necessary postings. 
Show proofs of the controlling account balances. 
Prepare a trial balance. 
19 

July 1. Received 10,000 %~inch cut-out cocks from Crane and Com- 
pany, $3,000, 2/10 n/30. 
2. Advanced $500 cash to salesmen to be used as traveling 

expenses for the month. 
4. Received bill from Producers Gas Company for gas, $67.82 

which was paid. 

10. Paid Crane and Company voucher. 
15. Received bill from Motor Monthly for $500 for advertising 

in the July issue of their magazine. 
20. Received bill from A. K. Simon for office supplies received, 

$47.56, 1/10 n/30. 

25. Received 10,000 reenforced visible glass measuring cylinders 
from Silica Products Company. The invoice amount was 
$5,000, 2/10 n/30. 



PROBLEMS 487 

31. Salesmen submit expense reports showing $480 cash expendi- 
tures for the month for which they are reimbursed. Payroll 
made up and check drawn for the following: 

Direct Labor $5,678.90 

Indirect labor 666 . 33 

Salesmen 1,200.00 

Office employees 950 . 00 

Purchased and received a drill from Morgan Machinery 
Company, $1,000, 2/10 n/30. 
Depreciation is to be considered as follows: 

Plant and equipment $459 . 83 

Office equipment 22 . 10 

Factory taxes for month are estimated to be $37.50. 
20-145* Record the following transactions in the proper columnai 
books of original entry as the occasion requires, make the necessary post- 
ings to the general and subsidiary ledger accounts, show proof of the 
Control account balances, and prepare a trial balance on Apr. 30. 

The voucher register should contain money columns for accounts pay- 
able, factory overhead expense, marketing expenses, administrative 
expense, and general ledger debit. 
19 

Apr. 1. Voucher 1, RE Co., rent for factory building is paid, $200. 
3. Voucher 2, AB Co., repairs to machinery, $360. 
5. Voucher 3, AC Co., advertising finished product, $1,000. 
7. Voucher 4, PSMS, postage for general office use paid by 

cash, $20. 
9. Voucher 5, AD Co., small tools for factory use, $300, 1/10 

n/30. 
11. Voucher 6, AF Co., machinery for use in factory, $3,000, 

1/10 n/30. 

13. Voucher 7, AK Co., gasoline for delivery trucks, $100. 
15. Voucher 8, PYMS, payroll consisting of direct labor, $4,000; 
indirect labor, $600; salesmen's salaries, $500; office salaries, 
$300; officers' salaries, $400 is paid. 
17. Voucher 9, AL Co., officers' traveling expenses paid by cash, 

$125. 

19. Voucher 5 paid to AD Co. 
21. Voucher 6 paid to AF Co. 

23. Voucher 10, AP Co., job order cost cards for factory, $75. 
30. Received a credit memorandum from AP Co. for $8 over- 
charge on cost cards. 

20-146. The following general ledger accounts are used by the Penn 
Products Company: 
Direct Labor 

Factory Overhead Expense (Control) 
Stores Inventory (Control) 



COST FINDING FOR ENGINEERS 

Marketing Expense (Control) 

Administrative Expense (Control) 

Machinery and Equipment (Control) 

Accounts Payable (Control) 

Record the following transactions in the voucher register: 

19 

Jan. 1. Monroe Tool Company, voucher 100, store item 300, 4,000 

units, $800. 

2. Real Estate Company, voucher 101, factory rent, $400. 
4. J. C. Jordan Estate, voucher 102, office rent, $200 (divide 

equally between marketing and administrative expenses). 
6. Schultz Coal and Coke Company, voucher 103, factory fuel, 
$50. 

8. Diamond Supply Company, voucher 104, store item 301, 
2,000 units, $2,200. 

9. Mesta Machine Company, voucher 105, one No. 611 Grinding 
Machine, $1,142. 

9. P. & L. E. R. R., voucher 106, freight on grinding machine, 

$28. 
12. Alexander Brothers, voucher 107, office supplies $62 (divide 

equally between marketing and administrative expenses). 
16. C. Moore, Paymaster, voucher 108, factory payroll, direct 

labor $7,000, indirect labor $2,000. 
20. New York Tool Company, voucher 109, store item 302, 

500 units, $750. 
22. Keystone Box Company, voucher 110, packing supplies used 

in factory, $800. 
25. Morgan Fixture Company, voucher 111, store item 303, 10,000 

units, $200. 
31. Duquesne Light Company, voucher 112, power $300, divided 

as follows: factory $250; sales office $30; general office $20. 
31. C. Moore, Paymaster, voucher 113, factory payroll, direct 

labor $7,200, indirect labor $1,900. 

31. H. L. Beebe, Treasurer, voucher 114, office payroll, $4,200, 
divided as follows: marketing salaries, $2,800; administrative 
salaries, $1,400. 
31. Returned 100 units of store item 303 received from Morgan 

Fixture Company on account of being defective. 
Make all of the postings from the voucher register to the general ledger 
and the subsidiary ledgers, and take a trial balance. 

Show the proof of the accounts for stores inventory, factory overhead 
expense, marketing expense, and administrative expense. 

20-147. Record the following transactions in the journals listed below: 

1. Voucher register with money columns for accounts payable, stores, 
overhead expense, and sundry debit. 

2. Check register with money columns for accounts payable, purchase 
discount, and cash. 

3. Factory journal with money columns for work in process, overhead 
expense, stores, sundry debit, and sundry credit. 



PROBLEMS 489 

Make the postings to the general ledger and to the following subsidiary 
ledgers: 

Stores ledger with accounts for stores items 219 and 420. 

Overhead expense ledger with accounts for rent, repairs to building, 
indirect labor, factory supplies, and depreciation on machinery. 

19 

May 2. Received invoice and raw materials (Stock item 420) from 
Maymere and Company, 1/10 n/30, $655.20. 

3. Paid $200 rent for May to Nash Realty Company, for use of 
factory building. 

4. Received bill from Charles Green for repairs to factory build- 
ing, $165.09. 

5. Received invoice for two new boring mills from Newton 
Machinery Company, $2,150.00. Equipment received this 
date. 

6. Paid freight to P. R. R., $150 on boring mills. 

8. Received invoice and raw materials (Stock item 219) from 

Greco Brothers, 2/10 n/30, $1,540.40. 
12. Paid voucher in favor of Maymere and Company. 
17. Paid payroll for first half of month as follows: 

Direct Labor $4,444.44 

Indirect Labor 952.21 

Sales Salaries 500 . 00 

Officers' Salaries 300.00 

$6,196.65 

20. Withdrew from stores for use on job Ml 111, raw materials 

(Stock item 219) $790.50. 
25. Purchased factory supplies from Jenkins Supply Company, 

1/10 n/30, $121.16. 
27. Withdrew from stores for use on job Ml 112, raw materials 

(Stock item 420), $281.75. 
31. Factory payroll for second half of month amounted to the 

following; but it was not paid until June 2. 

Direct Labor $3,916.20 

Indirect Labor 895 . 16 

$4,811.36 



31. Depreciation on machinery for May amounted to $195.10. 

Show the proofs of the balances in the control accounts and prepare a 
trial balance. 

20-148. In recording the transactions, use the following journals and 
ledgers : 

1. Voucher register with money columns for accounts payable, stores 
inventory, factory overhead expenses, marketing expenses, and adminis- 
trative expenses, sundry debit, sundry credit, folio, and account. 



COST FINDING FOR ENGINEERS 

2. Check register with money columns for cash, purchase discount, and 
accounts payable. 

3. Stores ledger with accounts for ore, coke, limestone, and No. 2 gas- 
engine oil. 

4. Overhead expense ledger with accounts for indirect labor, indirect 
supplies, power, and repairs to equipment. 

5. Marketing expense ledger with accounts for salaries, traveling 
expense, advertising, and freight out. 

6. Administrative expense ledger with accounts for salaries, office 
expense, postage, and telephone and telegraph. 

7. Expense distribution summary sheet for each of the three expense 
control accounts. 

Enter the following transactions of the Edgewood Steel Company in 
the voucher register and the proper subsidiary ledgers. Then post the 
voucher register entries to the proper general ledger accounts and prepare 
a trial balance, proving the balances in the control accounts with their 
respective subsidiary records. 
19 
Jan. 1. Voucher 100 T. C. Mann, Postmaster, for postage, $40 which 

was paid for. 
2. Voucher 101 L. H. Corwin, for repairs to equipment $62.25. 

4. Voucher 102 Iron Age Magazine, for advertising $500. 

5. Voucher 103 Duluth Mines, Inc., for iron ore, 10,000 tons, 

$10,000. 

6. Voucher 104 P. and L. E. R. R. for freight on ore, $2,000 paid 

by cash. 

7. Voucher 105 Mason Supply Company, for indirect supplies 

$220. 

9. Voucher 106 P. R. R. Co., for outfreight, $642 paid by cash. 
11. Voucher 107 Elwood and Myers, for office expenses, $67.50, 
1 per cent discount, paid by cash. 

14. Voucher 108 Connellsville Coke Company, 5,000 tons coke, 

$5,000. 

15. Voucher 109 United Engineering and Foundry Company for 

new machinery, $15,000. 
17. Voucher 110 J. Abel, Paymaster for factory payroll, $9,500 

direct labor, and $1,000 indirect labor, which 

was paid by cash. 
20. Voucher 111 Texas Oil Company, for 250 gallons No. 2 

gas engine oil, $500. 
25. Voucher 112 Melrose, Thomas Company, for indirect supplies 

$16.50. 
28. Voucher 113 Kittanning Limestone Company, for 2,000 tons 

limestone, $5,000. 

28. Voucher 114 Connellsville Coke Company, for 5,000 tons 

coke, $5,500. 

29. Voucher 115 H. Olsen, Sales Manager, for traveling expenses, 

$600, which is paid by cash. 



PROBLEMS 491 

29. Voucher 116 Bell Telephone Company, for telephone service 

$56.20. 

30. Voucher 117 Beach Bottom Power Company, for power 

consumed, $316.11. 

30. Voucher Ii8 J. Abel, Paymaster, for payroll, direct labor, 
$9,320 and indirect labor $980, which was. paid 
by cash. 
30. Voucher 119 Cashier, for office payroll $840, and salesmen's 

salaries $1,260 which was paid by cash. 

30. Iron Age Magazine Company send a credit memorandum for 
$100 on account of overcharge for advertising as charged on 
voucher 102. 

20-149. The Keystone Wood Products Company manufactures office 
desks. Their voucher register contains the following column headings: 
Date; Payable To; Voucher Number; Paid: Date, Check Number; 
Accounts Payable (201); Stores Inventory (1000); Factory Expense 
(600); Marketing Expense (700); Administrative Expense (800); General 
Ledger: Debit, Credit, L. F., Account. 
The subsidiary ledgers are as follows: 

1. Stores Inventory ledger accounts: 

1001 Clear Yellow Pine 1006 No. Sand Paper 

1002 No. 1 White Oak 1007 No. 1 Clear Varnish 

1003 Clear Poplar 1008 1", No. 12 Screws '(F. H.) 

1004 Finishing Nails 1009 Miscellaneous Supplies 

1005 Flake Glue 

2. Factory Overhead ledger accounts: 

601 Royalties 606 Miscellaneous Factory Expense 

602 Fuel 607 Repairs, Machinery 

603 Indirect Labor 608 Power 

604 Factory Supplies 

605 Rent 

3. Marketing Expense: 

701 Advertising 704 Traveling Expense 

702 Salesmen's Salaries 705 Rent 

703 Delivery Expense 706 Freight Out 

4. Administrative Expense: 

801 Office Salaries 804 Telephone & Telegraph 

802 Officers' Salaries 805 Rent 

803 Office Supplies 806 Dues and Subscriptions 

The general ledger accounts required for this problem are as follows: 
1000 Stores Inventory (control account). 

150 Machinery. 

201 Accounts Payable (control account). 

502 Direct Labor. 

600 Factory Overhead Expense (control account). 

700 Marketing Expense (control account), 

800 Administrative Expense (control account). 
Prepare the following: 



492 COST FINDING FOR ENGINEERS 

a. Entries for the transactions in the voucher register. 
6. A distribution of the voucher transactions in the stores inventory 
and expense subsidiary ledgers. 

c. A trial balance from the voucher register postings on July 31, 19 . 

d. A summary of each expense and inventory subsidiary ledger in 
operating ledger form. 

Voucher Account 

No. No. 

July 1 100 1,001 Louisiana Lumber Company, 22,000 board 

feet yellow pine $2,200, 1/10 n/30. 

2 101 1,001 B. & O. R. R., freight on yellow pine $220. 

3 102 701 Perry Printing Company catalogues, 

$1,500, 1/10 r/30. 

4 103 150 Deems Machine Corporation, 3 wood work- 

ing machines, $10,500, 2/10 n/30. 

5 104 1,002 Arkansas Timber Company, 25,000 board 

feet of white oak, $2,250, 1/10 n'/30. 

6 105 J. P. Watson Estate, rent $600; account 

605, $500; accounts 705 and 805, $50 each. 

7 106 1,009 Logan Hardware Company, 10,000 metal 

desk handles, $1,000, 2/10 n/30. 
9 107 1,007 Chicago Chemical Company, 1,000 gallons 

varnish $3,000, 1/10 n/30. 

11 108 607 Wall Welding Company, $119. 

13 109 803 Hemstall and Barnes, $72, 1/10 n/30. 

15 110 1,006 Meeker Abrasives, Inc., 100 quires sand 

paper, $50. 

16 111 H. Decker, Paymaster, $10,450: account 

502, $5,400; 603, $1,600; 702, $1,500; 801, 
$1,200; 802, $750. 

18 112 1,003 Ozark Lumber Company, 30,000 board 

feet poplar, $4,500. 

19 113 1,003 P. R. R. Company, freight on poplar, 

$500. 

20 114 1,005 Chicago Glue Works, 1,000 pounds flake 

glue $200, 2/10 n/30. 

21 115 Returned to Chicago Chemical Company 

50 gallons varnish on account of being sub- 
standard in quality. 

22 116 806 Wood Products Trade Association dues, 

for year, $100. 

23 117 706 P. & L. E. R. R., freight on shipment to 

customer, $167. 

24 118 703 Oakland Oil Company, 50 gallons engine 

oil, $30. 

25 119 1,008 Pittsburgh Machine Screw Company, 

100 gross screws, $15, 2/10 n/30. 

26 120 602 Ohio River Coal Company, 5 tons coal, $15. 



PROBLEMS 493 

26 121 606 Perry Printing Company, 10,000 time 

tickets, $50. 

27 122 1,004 American Wire Company, 1,000 pounds 

finishing nails, $50. 

29 123 804 Bell Telephone Company, $29. 

30 124 704 H. C. Barr, Cashier, $468. 

31 125 601 M. R. Ferris, $4,000. 

126 608 Penn Power Company, $282, for power 

consumed. 

127 H. Decker, Paymaster, $10,860: account 
502, $5,600; 603, $1,710; 702, $1,600; 801, 
$1,200; 802, $750. 



20-150. The Burlington Woodworking Company manufactures a 
variety of office furniture. A trial balance on June 30, 19 , was com- 
posed of the following items : 



Cash $ 7,701.30 

Accounts Receivable (control) 84,910.32 

Stores (control) 41 ,388. 16 

Finished Goods (control) 11,382. 16 

Machinery and Equipment 178,474.38 

Reserve for Depreciation, Machinery $ 41,742.20 

Office Fixtures 2,167.50 

Reserve for Depreciation, Office Fixtures. . 991 . 10 

Accounts Payable (control) 35 , 904 . 12 

Interest Accrued 300.00 

Mortgage Payable 30,000.00 

Capital Stock 200,000.00 

Surplus 16,093.32 

Sales 469,655.80 

Sales Returns 5, 171 . 16 

Manufacturing Cost (control) 393 , 510 . 26 

Marketing Expense (control) 37,246. 14 

Administrative Expense (control) 27,975.04 

Interest Expense 1,200.00 

Sales Discount 3,560.12 

$794,686.54 $794,686.54 



Record the following transactions in the voucher register, cash receipts 
journal, check register, sales journal, and general journal. 

19 

July 1. Lumber and invoice received from Long-Bell Lumber Com- 
pany, $19,351, 1/10 n/30. 

Freight on above lumber paid to P. & L. E, R, R. Company, 
$964.14. 



494 COST FINDING FOR ENGINEERS 

Rent for the month, $600, was paid to Wm. L. Buck Realty 
Company. Apportion 60, 30, and 10 per cent respectively to 
manufacturing, marketing, and administrative expense. 
4. Received from J. A. Williams Hardware Company screws, 

brads, and door rollers, $1,512.90, 2/10 n/30. 
7. Salesmen are reimbursed for traveling expenses, $931.80. 

12. Received stationery from EL B. South Printing Co., $165.50, 
net 30 days, 

18. A bill is received from West Penn Power Company for power 
consumed during the month, $361.96, net. 

24. The payroll is made up as follows : 

Direct Labor $10,990.20 

Indirect Labor 1,780.00 

Salesmen's Salaries 2,400.00 

Office Salaries 1,640.00 

Executives' Salaries 3,600.00 

27. Received a bill from Nation's Business for advertising space, 

$951.00. 
30. Received an invoice from the New York Tool Manufacturing 

Company for small tools, $3,973.46. 

Prepare general journal entries for the following adjustments to be 
considered at July 31, 19 

Depreciation on machinery and equipment. ... $1 ,487.20 

Depreciation on office fixtures 18 . 06 

Interest accrued on mortgage 150.00 

Raw materials costing $15,961.12 were requisitioned from the stores 
department for use in production. 

A summary of the transactions for the month of July is as follows: 

Sales on account $44 , 781 . 40 

Cash received from customers 63,711 .68 

Discounts allowed customers 1 , 593 . 10 

Vouchers paid not mentioned previously 41,395.66 

Set up the necessary accounts in the general ledger and make the 
postings thereto. Also make the postings to the subsidiary expense dis- 
tribution sheets for manufacturing cost, marketing expense, and adminis- 
trative expense. Also prepare an operating ledger, and show proof 
where possible for all control account balances. 

Chapter XXI 

21-151. The Conkel Concrete Company has a fleet of 15 trucks. The 
trucks are depreciated on the basis of 4 years' useful life and by the 
straight line method. From the following information, prepare a record 
that will show the depreciation applicable to the month of August, 1934. 
State the advantages of this type of a record. 



PROBLEMS 



495 



Truck Number 

1 

2 

3 

4 

5 

6 

7 

8 

9 
10 
11 
12 
13 
14 
15 



Date of Purchase 

June 1, 1930 
July 1, 1930 
Mar. 1, 1931 
Mar. 1, 1931 
Mar. 1, 1931 
Mar. 1, 1931 
Mar. 1, 1931 
Apr. 1, 1932 
Apr. 1, 1932 
Apr. 1, 1932 
July 1, 1933 
July 1, 1933 
Jan. 30, 1934 
May 1, 1934 
July 1, 1934 



Cost 

$3,250.00 
3,640.00 
4,000.00 
4,000.00 



4,000.00 
4,000.00 
4,000.00 
3,750.00 
3,750.00 
3,750.00 
3,000.00 



1,800.00 
3,600.00 
3,600.00 
4,000.00 



21-162. The American Gear Company manufactures a variety of cut 
gears. Monthly financial and operating statements are prepared, and 
the operating accounts are closed on Dec. 31 of each year. 

The following machines are used in the plant: 



Machine 










Date acquired 


Cost 


Estimated 

1 * 
















Number 


Name 








1 


Cutting Machine 


January 1, 1929 


$ 4,000 


12 years 


2 


Robbing Machine 


July 1, 1929 


10,000 


10 years 


3 


Planer 


August 1, 1929 


15,000 


15 years 


4 


Milling Machine 


January 1, 1931 


2,500 


8 years 


5 


Grinding Machine 


July 1, 1934 


1,500 


7 years 


6 


Drill Press 


June 1, 1935 


1,200 


10 years 



All machines have been depreciated on the straight line basis and no 
scrap value was considered for any of the machines. 

From the preceding data, you are to prepare the following as of Dec. 31, 
1936: 

1. General ledger accounts: Machinery, and Reserve for Depreciation 
on Machinery, with all postings shown therein. 

2. Equipment ledger records for each of the machine units. 

3. Indicate how the equipment ledger records are controlled by the 
general ledger control accounts. 

Chapter XXII 

22-153. Classify the following operations and occupations as to direct 
labor and indirect labor, the work being performed in a machine shop. 



496 



COST FINDING FOR ENGINEERS 



a. Toolroom attendants 
6. Cutting off 

c. Assembling 

d. Drilling 

e. Storeroom attendants 
/. Material chaser 

g. Boring 
h. Lathe work 
i. Laying out 
j. Inspecting 
k. Superintendent 
I. Foremen 
m. Watchman 



n. Planing 

o. Production engineer 
p. Time study man 
q. Cost accountant 
r. Milling 
s. Janitor 
t. Draftsman 
u. Grinding 
v. Timekeeper 
w. Maintenance 
x. Bench labor 
y. Heat treating 
z. Welding 



22-164. Visit some industrial establishment in your community and 
obtain all the information possible about their payroll system. Write a 
report showing the internal check in operation, and outline clearly or 
chart the accounting control involved. 

22-155. The Dormont Machine Shop employs five machinists. The 
regular working day is 7 hours. Time and one-half is allowed for over- 
time, and double-time is allowed for Sundays and holidays. For the 
month of May, 1936, the Sundays fell on the 3rd, 10th, 17th, 24th, and 
31st. The workmen and their hourly rates are as follows: 









Deduction each 


Num- 
ber 


Name 


Hourly rate 


pay period for 
capital stock 








subscription 


1 


A. B. Cole 


$1.00 


$2.50 


2 


D. E. Ferris 


.80 


2.50 


3 


G. H. Isaacs 


,75 


2.00 


4 


J. K. Logan 


.60 


1.50 


5 


M. N. Olsen 


.50 


1.00 



Number 1 worked 7 hours every week day except on the llth and 
21st, when he was not at work. He also worked 12 hours on the 10th 
and 8 hours on the 31st. 

Number 2 worked 7 hours every week day except on the 16th when he 
was off work and 10 hours on the 30th. He also worked 7 hours on the 
3rd. 

Number 3 worked 7 hours every week day only. 

Number 4 worked 7 hours every week day except on the 22nd when he 
worked 11 hours. 

Number 5 worked 7 hours every week day except on the 1st and 2nd. 
He also worked 8 hours on the 17th. 

Prepare the following: 



PROBLEMS 497 

a. Payroll sheet for the period of May 1 to 15, and for the period of 
May 16 to 31, showing the earnings of each workman. 

b. The entry to record the liability for the payroll on May 16 and on 
the 31st. 

c. The entry to show the payment of the payrolls on May 20 and 
June 4 respectively for the payrolls of the first half and the last half of the 
month of May. 

22-156. The payroll distribution of a glass container factory for the 
month of Apr. 19 , was as follows: 

Apr. Apr. 

1-15 16-30 

Direct Labor: 

Mixing and melting ; $ 650 $ 672 

Pressing 1,540 1,607 

Lehring 365 377 

Inspecting 560 593 

Packing 1,000 1 ,044 

Indirect Labor: 

Powerhouse 300 300 

Machine shop 550 547 

Blacksmith shop 250 242 

Steamfitting shop 125 126 

Carpenter shop 125 123 

Storeroom 350 340 

Janitor 100 100 

Foremen and superintendent 750 750 

Prepare entries for the following transactions, and in each case give the 
name of the journal in which the entries are made: 

a. To record the liability for the payroll on Apr. 15 and 30. 

6. To show the payment of the payrolls on Apr. 20 and May 5, respec- 
tively for the payrolls of the first half and the last half of the month. 

c. To distribute the payroll considering that there are labor accounts 
in the general ledger for Direct Labor and Indirect Labor. 

Chapter XXIII 

23-167. Prepare a code classification for the following accounts of a 
glass manufacturing plant: 

The accounts in the general ledger are as follows: 
Cash ,' 

Accounts Receivable (control) Reserve for Taxes 

Inventory, Raw Materials Reserve for Furnace Relining 

Inventory, Finished Ware Mortgage Payable 

Inventory, Supplies Reserve for Doubtful Accounts 

Prepaid Insurance Reserves for Depreciation (Con- 

Organization Expenses trol) 

Land Unissued Capital Stock 

Buildings Capital Stock 



498 



COST FINDING FOR ENGINEERS 



Melting Tanks 

Lehrs 

Machinery 

Small Tools 

Molds and Dies 

Machine-shop Equipment 

Conveyor 

Railroad Siding 

Auto Trucks 

Office Equipment 

Patents 

Notes Payable 

Accounts Payable (control) 

Interest Accrued on Notes and 
Mortgages Payable 

Reserve for Compensation Insur- 
ance 



Surplus 

Sales, Fruit Jars 

Sales, Glasses 

Sales, Bottles 

Sales, Food Jars 

Sales, Specialty Ware 

Sales Returns and Allowances 

Manufacturing Cost (control) 

Marketing Expense (control) 

Administrative Expense (control) 

Doubtful Accounts 

Interest Expense 

Sales Discount 

Purchase Discount 

Manufacturing Account 

Marketing Account 

Administration Account 



Profit and Loss 
The accounts in the manufacturing cost ledger are as follows: 



Sand 

Soda 

Lime 

Feldspar 

Arsenate of Soda 

Glass Gullet 

Fruit Jar Cap Wires 

Fruit Jar Rubbers 

Purchase Returns and Allowances 

Freight and Cartage In 

Direct Labor 

Indirect Labor 

Repairs Plant and Equipment 

Fuel Oil 

Gas 

Power 

Amortized Operating Expense 

Containers and Paste 

Packing Labor 



Miscellaneous Manufacturing Ex- 
pense 

Insurance on Plant Building and 
Machinery 

Experimental and Research 

Compensation Insurance 

Furnace Relining 

Depreciation on Auto Trucks 

Depreciation on Buildings 

Depreciation on Melting Tanks 

Depreciation on Lehrs 

Depreciation on Machinery 

Depreciation on Molds and Dies 

Depreciation on Machine-shop 
Equipment 

Depreciation on Railroad Siding 

Depreciation on Patents 

Taxes 

Auto Expense 



The accounts in the marketing expense ledger are as follows: 



Amortized Operating Expense 

Taxes 

Auto Expense 

Salesmen's Salaries 

Insurance on Warehouse 

Samples 

Office Expense 

Postage 



Depreciation on Conveyor 
Depreciation on Auto Trucks 
Depreciation on Railroad Siding 
Depreciation on Buildings 
Compensation Insurance 
Entertainment Expense 
Traveling Expense 
Freight Out 



The accounts in the administrative xpense ledger are as follows: 
Office Expense Depreciation on Office Equipment 



PROBLEMS 



499 



Postage Officers' Salaries 

Office Salaries Compensation Insurance 

Amortized Operating Expense Dues and Subscriptions 

23-168. Prepare a code classification for the following accounts of a 
trading concern. 

Purchases Electrical Supplies, De- 
partment C 
Purchase Returns and Allowances 



Cash 

Notes Receivable 

Accounts Receivable 

Railroad Claims 

Inventory Hardware, Department 
A 

Inventory Paint, Department B 

Inventory Electrical Supplies, De- 
partment C 

Prepaid Insurance 

Store Fixtures 

Advertising Fixtures 

Office Equipment 

Auto Trucks 

Notes Payable 

Accounts Payable 

Mortgage Payable 

B. K. Elliott, Capital 

B. K. Elliott, Personal 

Sales Hardware, Department A 

Sales Paint, Department B 

Sales Electrical Supplies, Depart- 
ment C 

Sales Returns and Allowances 

Purchases, Hardware, Department 
A 

Purchases Paint, Department B 



Freight In 
Heat and Light 
Auto Expense 
Office Expense 
Store Wages 

Auto Truck Drivers' Wages 
Office Wages 
Rent 

Store Expense 
Dues and Subscriptions 
Freight Out 
Advertising 

Telephone and Telegraph 
Postage 

Interest Earned 
Purchase Discount 
Rentals Received 
Loss on Sale of Capital Assets 
Interest and Discount Paid 
Sales Discount 
Donations 

Depreciation on Auto Truck 
Reserve for Depreciation on Auto 
Truck 



23-159. Prepare a code classification for the following accounts of a 

trading and manufacturing concern. 

The general ledger accounts are as follows: 

Cash 

Petty Cash 

Notes Receivable 

Accounts Receivable 

Advances to Salesmen 

Inventory Stores 

Inventory Work in Process 

Inventory Finished Sets 

Inventory Accessories 

Interest Accrued on. Notes Receiv- 
able 

Prepaid Advertising 

Prepaid Insurance 

Inventory Delivery Supplies 



Reserve for 
Truck 
Reserve for 
Equipment 
Reserve for 
Fixtures 
Reserve for 


Depreciation, 
Depreciation, 
Depreciation, 
Depreciation, 


Auto 
Office 
Store 
Ma- 



chinery 

Mortgage Payable 
Unissued Capital Stock 
Capital Stock 
Surplus 

Reserve for Contingencies 
Sales, Style A 



500 



COST FINDING FOR ENGINEERS 



Inventory Office Supplies 

Advertising Fixtures 

Building 

Land 

Auto Truck 

Office Equipment 

Store Fixtures 

Machinery 

SmaU Tools 

Patent Rights 

Notes Payable 

Accounts Payable 

Notes Receivable Discounted 

Accrued Payroll 

Accrued Interest on Notes Pay- 
able 

Salesmen's Commissions Accrued 

Reserve for Taxes 

Reserve for Compensation Insur- 
ance 

Reserve for Doubtful Accounts 

Reserve for Depreciation, Adver- 
tising Fixtures 

Reserve for Depreciation, Build- 
ing 



Sales, Style B 

Sales, Style C 

Sales, Accessories 

Sales, Service 

Sales Returns and Allowances, 

Sets 

Sales Returns and Allowances, 
I Accessories 
Stores 

Purchases, Accessories 
Freight In Accessories 
Direct Labor 
Manufacturing Overhead Expense 

(control) 

Marketing Expense (control) 
Administrative Expense (control) 
Interest on Notes Receivable 
Purchase Discount 
Sales Discount 

Interest and Discount Expense 
Doubtful Accounts 
Interest on Mortgage Payable 
Manufacturing 
Marketing 
Administrative 



Profit and Loss 

The accounts in the manufacturing overhead expense ledger are as 
follows : 
Indirect Labor 
Light and Power 
Oil, Waste, and Compounds 
Repairs to Buildings 
Insurance on Buildings 
Depreciation, Buildings 
Depreciation, Machinery 



Repairs to Machinery 

Compensation Insurance 

Gas 

Miscellaneous Factory Expense 

Taxes 

Cleaning 

Superintendence 

Warehouse Rent 



Amortization, Patent Rights 
Experimental Research 

The accounts in the marketing expense ledger are as follows: 



Delivery Expense 

Commissions 

Express and Freight Out 

Depreciation, Advertising 

tures 

Depreciation, Auto Truck 
Depreciation, Store Furniture 



Warehouse Rent 
Salesmen's Salaries 
Traveling Expenses 
Fix- Service Department Salaries 
Advertising 
Repairs to Auto Truck 
Insurance, Auto Truck 
Compensation Insurance 



Insurance on Finished Goods 

The accounts in the administrative expense ledger are as follows: 
Office Salaries Office Expense and Supplies 

Depreciation, Office Equipment Telephone and Telegraph 



PROBLEMS 



501 



Legal Fees Compensation Insurance 

Postage 

23-160. Prepare a code classification for the following accounts of a 

manufacturing concern. 

Sales 

Returns and Allowances on Sales 
Raw Material Purchases 
Freight In 
Direct Labor 
Indirect Labor 
Heat, Light and Power 
Factory Expenses and Supplies 
Insurance on Plant and Equipment 
Advertising 

Insurance on Finished Goods 
Salesmen's Salaries 
Salesmen's Traveling Expense 
Office Salaries 

Stationery and Office Supplies 
Postage 
Office Expense 
Office Rent 
Officers' Salaries 
Purchase Discount 
Interest Earned 
Sales Discount 
Doubtful Accounts 
Interest on Notes Payable 
Interest on Mortgage Payable 
Interest on Bonds 
23-161. Prepare a code classification for the following accounts of a 

contracting concern. 

New Business Expense 
Notes Payable 
Accrued Office Salaries 
Officers' Expenses 
Office Salaries 
Office Expense 
Loss on Sale Capital Assets 
Licenses, Auto 
Prepaid Licenses 
Repairs to Equipment 
Rent for Equipment 
Real Estate 



Cash 

Petty Cash 

Accounts Receivable 

Notes Receivable 

Inventory Raw Materials 

Inventory Work in Process 

Inventory Finished Goods 

Bond Discount 

Land 

Buildings 

Machinery and Small Tools 

Furniture and Fixtures 

Accounts Payable 

Notes Payable 

Mortgage Payable 

Bonds Payable 

Reserve for Depreciation, Buildings 

Reserve for Depreciation, Machin- 
ery and Tools 

Reserve for Depreciation, Furni- 
ture and Fixtures 

Reserve for Doubtful Accounts 

Reserve for Water Rent 

Reserve for Working Capital 

Surplus 

Capital Stock 



Cash 

Accounts Receivable 

Accounts Payable 

Buildings 

Charity and Donations 

Car and Truck Labor 

Car and Truck Material 

Petty Cash 

Purchase Discount 

Reserve for Depreciation, Contrac- 
tors' Equipment 

Reserve for Depreciation, Office 
Equipment 

Contractors' Equipment 

Office Equipment 

Goodwill 

Insurance 



Salaries Payable 
Officers' Salaries 
Surplus 
Capital Stock 
Small Tool Expense 



502 COST FINDING FOR ENGINEERS 

Miscellaneous Income Taxes 

Job Income Accrued Wages 

Interest Expense Yard Labor and Material 

Job Labor Depreciation on Contractors' Equip- 

Job Material ment 

Heat and Light, Office Depreciation on Office Equipment 

Miscellaneous Contracting Expense Inventory, Supplies 



Chapter XXIV 

24-162. The following trial balance was taken from the ledger of the 
Byers Pipe Company before closing the operating accounts on Dec. 31, 
19. 



Plant and Equipment $124,000 

Raw Material Inventory, Jan. 1, 19 35,000 

Purchases of Raw Material 101,000 

Work in Process Inventory, Jan. 1, 19 30,000 

Finished Goods Inventory, Jan. 1, 19 25,000 

Cash 11,000 

Accounts Receivable 120,000 

Capital Stock $200,000 

Notes Payable 3,000 

Accounts Payable 84,000 

Direct Labor 230,000 

Indirect Labor 15,000 

Heat, Light, and Power 15,000 

Insurance on Plant Equipment 5 , 000 

Repairs to Equipment 37 , 500 

Shop Supplies 30,000 

Taxes on Land and Building 7 , 500 

Sales Returns 1 , 000 

Salesmen's Salaries and Commissions 17,500 

Rentals Received 2,000 

Advertising 6,000 

Delivery Expense 17,500 

Interest on Notes Payable 500 

Officers' Salaries 12,500 

Telephone and Telegraph 500 

Postage 500 

Rent 1 1 , 500 

Sales Discount 500 

Sales 540,000 

Purchase Discount 1 , 000 

Surplus 24,000 

$854,000 $854,000 



PROBLEMS 503 

Additional data to be considered on Dec. 31, 91 , were as follows: 

Raw material inventory $43 , 340 

Work in process inventory 27 , 150 

Finished goods inventory 25 , 000 

Direct labor accrued 1 , 520 

Indirect labor accrued 468 

Prepaid insurance 2 , 500 

Depreciation on plant and equipment is 8 per cent per annum. 

Create a doubtful accounts reserve equal to 1 per cent of the outstand- 
ing accounts receivable. 

Set up ledger accounts and enter therein amounts as shown in the trial 
balance. 

Prepare a work sheet having columns for trial balance, adjustments, 
manufacturing, marketing, administrative, profit and loss, surplus (one 
column only), and balance sheet. 

Prepare and post the adjusting and closing entries, using revenue 
accounts. 

Prepare a statement of production cost, a statement of profit and loss, 
a statement of surplus and a balance sheet. 

24-163. The following is a trial balance of the Buckeye Products 
Corporation on Dec. 31, 19 . From this trial balance and other data 
given, prepare the following: 

1. Work sheet (using revenue account columns for manufacturing, 
marketing, administrative, and profit and loss). 

2. Adjusting entries. 

3. Closing entries. 

4. Statement of production cost. 

5. Statement of income, profit and loss. 

6. Statement of surplus. 

7. Balance sheet. 



504 COST FINDING FOR ENGINEERS 

Trial Balance, Dec. 31, 19 

Capital Stock $115,000 

Surplus 16, 165 

Land $ 7,500 

Buildings 62,500 

Machinery 82,500 

Reserves for Depreciation 35,000 

Cash 11 ,700 

Notes Receivable 11,060 

Notes Receivable Discounted 10 , 000 

Accounts Receivable 22 , 200 

Inventory, Raw Materials, Jan. 1, 19 14, 100 

Inventory, Goods in Process, Jan. 1, 19 17,250 

Inventory, Finished Goods, Jan. 1, 19 25,000 

Patterns and Drawings 2 , 875 

Office Furniture and Fixtures 1 ,200 

Notes Payable 25,000 

Accounts Payable 5 , 000 

Mortgage Payable 37,500 

Accrued Wages 2,750 

Prepaid Insurance 1 , 450 

Prepaid Bank Discount 300 

Purchases, Raw Materials 50,000 

Direct Labor 50,000 

Light and Power 4,800 

Heat 1,000 

Factory Repairs 4 , 200 

Indirect Labor 12,000 

Factory Expenses, Miscellaneous 13,000 

Sales 185,000 

Interest Received 1 , 250 

Interest Expense 3,500 

Sales Discounts 3 , 000 

Freight In 1 ,000 

Freight Out 3,530 

Salesmen's Salaries 9,000 

Traveling Expenses, Salesmen's 2 , 600 

Advertising 1 , 600 

Warehouse Rent 1 ,800 

Officers' Salaries 7,500 

Postage. 600 

Telephone and Telegraph 1 ,200 

Office Expenses 2,000 

Office Rent 1 ,200 

Purchase Discounts 500 

$433,165 $433,165 



PROBLEMS 505 

The adjustments to be considered at the end of the year, Dec. 31, 19 , 
are as follows: 

Bank discount expense $240 

Doubtful accounts estimated to be 3 per cent of outstanding 
accounts receivable. 

Inventory, raw materials 35 , 000 

Inventory, goods in process 20,000 

Inventory, finished goods 15 , 000 

Depreciation on buildings, 3 per cent per annum on cost. 
Depreciation on machinery, 10 per cent per annum on cost. 
Depreciation on patterns and drawings, 25 per cent per 

annum on cost. 
Depreciation on furniture and fixtures, 8 per cent per 

annum on cost. 

Accrued interest on mortgage 1 , 125 

Insurance (factory) 1 , 200 

24-164. From the following trial balance and adjustment data taken 
from the books and records of the Forest Hills Products Company, 
prepare: 

1. Worksheet. 

2. Statement of production cost. 

3. Statement of income, profit and loss. 

4. Statement of surplus. 

5. Balance sheet. 

6. Adjusting entries. 

7. Closing entries. 

Trial Balance, Dec. 31, 19 

Cash $ 14,750.00 

Petty Cash 500.00 

Notes Receivable 5,250.00 

Accounts Receivable 119,375.00 

Inventory, Raw Materials, Jan. 1, 

19 87,800.00 

Inventory, Work in Process, Jan. 1, 

19 32,700.00 

Inventory, Finished Goods, Jan. 1, 

19 68,820.00 

Prepaid Insurance 1 , 004 . 40 

Land 15,000.00 

Buildings 45,000.00 

Machinery 55,000.00 

Small Tools 5,500.00 

Patents 23,500.00 

Patterns 4,250.00 

Office Equipment 5,900.00 

Notes Payable $5,000,00 



506 COST FINDING FOR ENGINEERS 

Accounts Payable 38,827.40 

Mortgage Payable on Plant and 

Equipment 40,000.00 

Bonds Payable 100,000.00 

Reserve for Depreciation, Buildings . . 5 , 000 . 00 
Reserve for Depreciation, Machinery. 6,000.00 
Reserve for Depreciation, Patents .... 6 , 91 1 . 80 
Reserve for Depreciation, Office Equip- 
ment 1,900.00 

Reserve for Doubtful Accounts 2 , 850 . 00 

Capital Stock 250,000.00 

Surplus 55,755.20 

Sales 1,054,250.00 

Sales Returns and Allowances 51 , 965 . 00 

Purchase Returns and Allowances, 

Raw Materials 9,383.54 

Purchases, Raw Material 420 , 979 . 00 

Direct Labor 373,925.60 

Indirect Labor 55,672.00 

Power 21,182.00 

Repairs to Buildings 1 , 540 . 00 

Repairs to Machinery 1 , 720 . 00 

Factory Expenses 3,582.50 

Employees' Liability Insurance 4,426.50 

Office Salaries 18,535.00 

Postage 2,200.00 

Officers' Salaries 32,000.00 

Telephone and Telegraph 1 , 790 . 00 

Taxes on Real Estate 1 ,355 .00 

Stationery and Printing 2,350.00 

Freight In 10,352.56 

Freight Out 6,335.44 

Employees' Bond Expense 330 . 00 

Salesmen's Traveling Expense 19,300.00 

Salesmen's Salaries and Commissions . 40 , 580 . 00 

Bonus to Officers 10,000.00 

Sales Discount 8,213.20 

Purchase Discount 4 , 152 . 36 

Donations 475.80 

Insurance on Buildings 440 . 00 

Insurance on Equipment and Machin- 
ery 637.70 

Insurance on Finished Goods 392 . 34 

Sales Tax 1,054.26 

Interest on Notes Payable 47 . 00 

Bond Interest 2,500.00 

Interest on Mortgage 1 , 800 . 00 

$1,580,030.30 $1,580,030.30 



PROBLEMS 



507 



The following adjustments are to be considered on Dec. 31, 19 : 

Inventory of raw material, at cost, $90,000; at market, 

$80,000. 

Inventory, work in process $ 31 ,330 .00 

Inventory, finished goods 110,000.00 

Inventory, small tools 4 , 030 . 00 

Inventory, patterns 3,700.00 

Depreciation on buildings, 2)^ per cent of cost. 
Depreciation on machinery, 10 per cent of cost. 
Depreciation on office equipment, 10 per cent of cost. 
Amortize one-seventeenth of the patent cost. 
Charge one-half of one per cent of net sales to doubtful 

accounts. 

Interest accrued on notes receivable $ 26 . 26 

Direct labor accrued 3 , 672 . 62 

Indirect labor accrued 713 . 00 

Interest accrued on notes payable 25 . 00 

Interest accrued on mortgage payable 600 . 00 

Interest accrued on bonds payable 2 , 500 . 00 

Accounts receivable on the books, amounting to $3,899.74 are 

deemed uncollectible and should be written off. 
Apportion the following expense items: 





Manufac- 
turing 


Marketing 


Adminis- 
trative 






expense 






expense 
percentage 


percentage 


expense 
percentage 


Real estate taxes 


80 


10 


10 


Power 


80 


10 


10 


Repairs, insurance and depreciation 








on buildings 


80 


10 


10 


Liability insurance 


70 


20 


10 


Telephone and telegraph 




50 


50 


Stationerv and printing 


20 


30 


50 



Chapter XXV 

25-165. The following information is taken from the books and records 
of the Electro Lamp Company: 

Overhead Expense $ 45,000 

Inventory, Raw Materials, Jan. 1, 19 17,500 

Marketing Expenses 40 , 500 

Inventory, Raw Materials, Dec. 31, 19 (same 

year) 21 ,000 

Purchases, Raw Material 47,500 



5U8 COST FINDING fVK 

Inventory, Work in Process, Dec. 31, 19 (same 

year) 13,500 

Administrative Expense 37 , 500 

Inventory, Finished Lamps, Jan. 1, 19 , com- 
posed of 481 lamps manufactured in the past 

year 12 , 506 

Total Sales (8,075 lamps) 323,000 

Inventory, Work in Process, Jan. 1, 19 15,000 

Direct Labor 105 ,000 

Sales Returns 2,200 

Finished lamps (purchased 20, all of which have 

been sold) 600 

Indirect Labor 17,500 

Inventory, Finished Goods, Dec. 31 (same year) composed of 150 
lamps manufactured in past year and 851 lamps manufactured in the 
present year. 

Prepare : 

1. Statement of cost to manufacture. 

2. Statement of income, profit and loss. 

Show all computations involved in the preparation of the statements. 
25-166. The books of the Automatic Gear Shift Company showed the 
following facts on Dec. 31, 19 , the end of their fiscal year: 

Sales (40,000 units at $20 per unit) $800,000 

Inventory Finished Goods, Jan. 1, 19 (2,500 

units at $12) 30,000 

Raw Materials Used 277,190 

Direct Labor 249,515 

General Overhead 122,810 

Inventory Goods in Process, Jan. 1, 19 24,000 

Inventory Goods in Process, Dec. 31, 19 31,000 

Freight Out 400 

Marketing Expense, Miscellaneous 21 ,000 

Administrative Expense, General 32,500 

Finished Goods Purchased (in the open market, 

500 units at $16) 8,000 

Inventory Finished Goods, Dec. 31, 19 (3,000 

units) (assume all purchased units were sold) 

Prepare a statement showing: 

1. Manufacturing cost of goods produced. 

2. Cost of goods sold 

3. Operating profit 

4. Final net profit. 
Also present: 

1. Figures to show unit cost of production. 

2. Figures to show how the value of the new inventory of finished goods 
is determined. 



PROBLEMS 509 

26*167. From the following data, prepare a statement of production 

eost, and a statement of income, profit and loss. Also show the com- 
putation of the unit cost, and closing finished goods inventory. 

Finished Goods Inventory, Jan. 1, 19 (200 

units) $ 3,000 

Power 2,000 

Marketing Expenses 14,000 

Work in Process Inventory, Jan. 31, 19 6,000 

Interest on Mortgage 300 

Stores Inventory, Jan. 1, 19 42,500 

Purchases of Stores 25 , 500 

Finished Goods Inventory, Jan. 31, 19 (300 

units) ? 

Direct Labor 29,000 

Indirect Labor 6,000 

Purchase Discount 1 , 000 

Work in Process Inventory, Jan. 1, 19 4,000 

Depreciation on Plant and Equipment 5,000 

Stores Inventory, Jan. 31, 19 40,000 

Shop Maintenance 7 , 000 

Sales (4,900 units) 98,000 

Administrative Expenses 6 , 500 

25-168. From the following information, you are asked to prepare on 
June 30, 19: 

a. Statement of production cost. 

b. Statement of income, profit and loss. 

Raw Materials Used $100,000 

Work in Process Inventory, Jan. 1, 19 10,208 

Marketing Expenses 82,000 

Direct Labor 80,000 

Finished Goods Inventory, Jan. 1, 19 (4,000 

units) 20,400 

Administrative Expenses 31 ,000 

Overhead Expenses 120,000 

Work in Process Inventory, June 30, 19 6,000 

Sales (selling price, $7.10 a unit) 418,900 

There were 60,000 units manufactured during 

the six months period. 
Show clearly all the necessary computations. 

25-169. From the following information, prepare: 

a. Statement of production cost. 

6. Statement of income, profit and loss. 

Sales (11,000 units) $49,500 

Inventory, Work in Process, June 1, 19 (800 

units) 2,000 

Inventory, Finished Goods, June 1, 19 (3,000 



510 COST FINDING FOR ENGINEERS 

units) 9,065 

Inventory, Raw Materials, June 1, 19 10,000 

Inventory, Work in Process, June 30, 19 (1,200 

units) 3,000 

Inventory, Finished Goods, June 30, 19 (2,000 

units) ? 

Inventory, Raw Materials, June 30, 19 8,000 

Purchases, Raw Materials 10,000 

Direct Labor 10,000 

Indirect Labor 2,500 

Factory Supplies 1 , 500 

Miscellaneous Factory Expenses 5 , 000 

Marketing Expenses 10,400 

Administrative Expenses 4,045 

Show clearly all the necessary computations. 

26-170. From the following account balances, prepare a statement of 
manufacturing cost and a statement of profit and loss. Show clearly 
all the necessary computations. 

Direct Labor $260,000 

Power 6 ,000 

Raw Material Inventory, Jan. 1, 19 50,000 

Administrative Expenses 40 ,000 

Rent, Factory Building 3 ,000 

Work in Process Inventory, Dec. 31, 19 15 ,000 

Raw Material Purchases 400,000 

Indirect Labor 36 ,000 

Interest on Factory Mortgage 8 , 000 

Sales (80,000 units) 960 ,000 

Taxes, Plant Equipment 10 ,000 

Raw Material Inventory, Dec. 31, 19 60,000 

Factory Supplies Used 12,000 

Depreciation, Machinery 50 , 000 

Finished Goods Inventory, Jan. 1, 19 (5,000 

units) 49 ,500 

Marketing Expenses 80 , 000 

Miscellaneous Factory Expenses 13,000 

Work in Process Inventory, Jan. 1, 19 10,000 

There were 77,500 units manufactured during the year. 

Use the weighted average inventory method for computing the cost of 
the goods sold. 

25-171. From the books and records of the Fisher Generator Com- 
pany, the following account balances and other supplementary data were 
obtained. Prepare a statement of manufacturing cost and a statement 
of income, profit and loss: 

Raw Material Inventory, Jan. 31, 19 $ 70,000 

Raw Material Inventory, Jan. 1, 19 80,000 



PROBLEMS 511 

Direct Labor 40,000 

Factory Supplies 3,000 

Sales Allowances 1 ,000 

Factory Fuel 600 

Finished Goods Inventory, Jan. 1, 19 13,200 

Advertising 8,000 

Salesmen's Commissions and Salaries 4,000 

Factory Compensation Insurance 350 

Storeroom Expense 1 , 400 

Out Freight 1 ,672 

Raw Material Purchases . 60,000 

Work in Process Inventory, Jan. 1, 19 5,000 

Officers' Salaries 3,000 

Fire Insurance, Building and Machinery 250 

Miscellaneous Factory Expense 8 , 900 

Salesmen's Traveling Expense 2 , 000 

General Office Salaries 2,000 

Depreciation, Factory Building 2,500 

Office Expenses 1 ,000 

Work in Process Inventory, Jan. 31, 19 6,000 

Taxes, Buildings and Machinery 500 

Repairs and Maintenance, Factory 1 , 500 

Indirect Labor 5,000 

Sales 133,000 

The finished goods inventory consisted of 1,000 units on Jan. 1, 19 , 
and 3,000 units on Jan. 31, while 8,000 units were sold during the month. 
Show clearly the computation of the unit cost of production. 
25-172. From the following data, prepare the following statements: 

1. Statement of manufacturing cost. 

2. Statement of income, profit and loss. 

3. Statement of surplus. 

4. Balance sheet. 



512 COST FINDING FOR ENGINEERS 

THE PANTHER PAPER CORPORATION 

TRIAL BALANCE 

Jan. 31, IS 

Cash $ 7,980 

Accounts Receivable 25,000 

Stores Inventory, Jan. 31, 19 30,000 

Work in Process Inventory, Jan, 1, 19 5,000 

'Finished Goods Inventory, Jan. 1, 19 20,020 

Machinery 70,000 

Land 10,000 

Plant Buildings 50,000 

Prepaid Insurance 400 

Reserve for Depreciation on Machinery and Build- 
ings $ 26,208 

Accounts Payable 18 ,000 

Capital Stock 150,000 

Surplus 20,392 

Sales 32,000 

Sales Allowances 500 

Raw Materials Used 10,000 

Direct Labor 9,000 

Factory Supplies 1 ,700 

Indirect Labor 1 ,900 

Compensation Insurance 12 

Fire Insurance, Factory Equipment 30 

Plant Power 210 

Depreciation, Buildings 125 

Depreciation, Machinery 583 

Plant Heat 57 

Plant Water 10 

Office Salaries 1,200 

Postage. 50 

Office Expense and Supplies 200 

Advertising 500 

Officers' Salaries 600 

Salesmen's Salaries 1 ,200 

Salesmen's Traveling Expenses 323 

$246,600 $246,600 
* 6,160 unit* at $3.25 each. 

Adjustments on Jan. 31, 19 not reflected in the trial balance are as 
follows: 

Work in process inventory $4,627 .00 

Finished goods inventory ? 

Compute the unit cost of production, there being 7,500 units manu- 
factured during January. 
The units were sold at $4,00 each. 



INDEX 



Accounting, cycle, 172 

definition of, 1 

Accounts, arrangement in ledger, 
19 

analysis of, 9 

asset, 10 

capital, 9 

capital stock, 11 

chart of, 19 

classification, 9 

controlling, 239 

credit side of, 9 

debit side of, 9 

distinction between capital and 
operating, 14, 186 

doubtful, 133, 363 

equipment controlling, 325 

equity, 10 

expense, 12 

expense controlling, 309 

form of, 7 

impersonal, 13 

importance of manufacturing 
controlling, 294 

income, 13 

inventory controlling, 294 

liability, 12 

mixed, 18 

nature of, 8 

operating, 9, 19 

ownership, 11 

personal,* 13 

purpose of, 6, 39 

relationships, among capital, 15 
among operating, 17 

revenue, 357 

surplus, 11, 140 

title of, 18 

use of, 7 



Accounts receivable, turnover of, 

169 

Accruals, 94 
Accrued expense, 94 
Accrued income, 96 
Additions, 48, 189 
Adjusting entries, 91, 95, 97, 99, 
101, 102, 103, 119, 128, 133, 
134, 135, 136, 137, 138, 139, 
142 

preparation of, 174 
with revenue accounts, 364 
Adjustments, accrual, 94, 104 
at close of accounting period, 93 
depletion, 128 
depreciation, 119 
new inventory, 87, 91 
prepa} r ment, 98, 104 
Advances, 195, 203, 209 
Appraisals of equipment, 218 
Appreciation, 125 
Assets, classification of current, 193 
classification of fixed, 206 
current, 10 
distinction between current and 

fixed, 193 
donated, 216 
fixed, 10 

importance, of valuation of cur- 
rent, 193 
of fixed, 206 

tangible versus intengible, 207, 
209, 220 



B 



Balance sheet, 15, 43, 162 

Balance sheet measurements and 

ratios, 168 

investment of capital ratio in, 168 
working capital and ratios in, 168 



613 



514 



INDEX 



Betterments, 48, 189 
Bonds, valuation of, 209 
Bonus, officers 7 , 363 
Budgets, 388 

Business organization, and ac- 
counting, 6 
and business, 5 

C 

Capital stock, 5, 140 

subsidiary companies, 210 
Cash versus accrual basis, 93 
Check register, 275 
Closing entries, 91, 129, 178, 181, 

182 

with revenue accounts, 364, 366 
Closing the operating accounts, 
- 172, 177 
procedure in, 173 
process of, 172 
purpose of, 172 
ruling off after, 182 
Closing the owner's Personal ac- 
count, 182 

Closing the Profit and Loss ac- 
count, 181 

Code classifications, 347 
advantages, 347 
controlling accounts, 355 
principles of, 348 
purpose of, 347 
types of, 348 
mnemonic, 350 
numerical, fractional numbers, 

351 

whole numbers, 350 
Containers, 214, 362 
Corporation, 5, 11, 140 
Correcting entries, 81 
Cost, computation of unit, 376 
of goods manufactured and sold, 

376 
of goods purchased and sold, 

155, 374 
manufacturing, 285 

differentiated from expense, 

310 

or market value of inventory, 
198, 199, 200, 380, 381 



Cost, of production, 292 

statement of, 370, 371 
Cost accounting, new develop- 
ments in, 387 

definition of, 1 

value of, 386 

Cost department, function of, 386 
Cost elements, 285 

direct labor, 286 

overhead expense, 287 

raw material, 285 
Cost reports, 389 
Costs, changes in use of, 1 

importance of, 38? 

measurement of, 2 

standard, 388 

use of, 1, 2 



D 



Debit and credit principle, 25 
evolution of, 26 
rules of, 25 

Debit and credit table, 38 
Deferred charges, 10, 204 
Deficit, 161 
Depletion, 126 

reserve for, 128 
Depreciated asset, replacement of, 

122, 123, 124 

Depreciation, actual versus theo- 
retical, 117 
factors of, 110 
functional, 107 
methods of computing charge 

for composite life, 112 
fixed percentage of diminish- 
ing value, 113 
gross income, 111 
guarantee, 115 
production, 111 
sinking fund, 114 
sliding scale, 111 
straight line, 111 
working hours, 112 
nature of, 107 

necessity for considering, 107 
obsolescence, 118 
physical, 107 



INDEX 



515 



Depreciation, problem of, 111 

recording, 119 

replacement value basis, 116 

reserve for, 120 

work sheet for, 332 
Discount terms, cash, 28 
Discounts, purchase, 362 

sales, 363 

voucher system and purchase, 

281 

Dividends, 140, 141 
Donated assets, 216 
Doubtful accounts, 133, 363 



E 



Entries, adjusting (see Adjusting 

entries). 

closing, 91, 129, 181, 182, 364, 366 
correcting, 81 
opening, 56, 127 
Equipment controlling accounts, 

establishment of, 326 
nature of, 325 
necessity for, 325 
proving the, 330 
Equipment records, 216, 327 
Equities, 10 

Expenditures, capital and operat- 
ing, 47, 186 

capitalized operating, 191 
differentiating between capital 

and operating, 192 
Expense, capitalized, 208 
distribution of, 361 
general and administrative, 157, 

314 

incidental, 157 
manufacturing, 310 
marketing, 312 
operating, 157 
prorating, 361 

Expense, controlling accounts, gen- 
eral and administrative, 314 
manufacturing overhead, 311, 

318, 324 
marketing, 312 
necessity for, 309 
other, 315 



P 



Financial measurements and com- 
parisons, 164 

Finished goods purchased, 363 
Fixed property investment, turn- 
over on, 169 
Franchises, 221 
Freight on raw materials, 371 
Funds, computing amount of 
contribution to, 149 

contingency, 149 

nature of, 146 

redemption, 147 

replacement, 149 

sinking, 146 

special, 195, 203, 209 



G 



Goodwill, 222 



Improvements, 48, 189 
Income, incidental, 157 
nature of, 13 
operating, 154 
profit and loss, measurements 

and ratios, 166 
inventory turnovers, 167 
ratios of costs and expenses to 

net sales, 166 
statement of, 17, 35, 41, 42, 

152, 374, 375 

Interest on mortgage, 364 
Inventory, computation of finished 

goods, 35, 383 
finished goods, 290 
problems of, 380 
turnover of, 167 
valuation of, 196, 197, 198, 199, 

200, 380, 381 
work in process, 288, 373 
Inventory controls, 294 
finished goods, 305 
perpetual, 298 
raw material or stores, 295 
work in process, 302 



516 



INDEX 



Inventory pricing, 300 
first-in, first-out method of, 300 
moving average method of, 301 

Inventory valuation affected by 
distribution of expense, 376 

Investments, permanent, 208 
temporary, 202 



Journal, advantages of subdivi- 
sion of, 58 

cash disbursements, 45, 50 
cash receipts, 45, 48 
general, 45, 55 
purchase, 45, 52 
sales, 45, 54 
Journal voucher, 233 
Journalizing, 46 
Journals, columnar, advantages 

of, 236 

nature of, 225 
other, 235 
purpose of, 225 



Labor, direct, 286 

distribution of, 337 

indirect, 286 

in statement of cost of produc- 
tion, 372 

Ledger, advantages of subsidiary, 
238 

equipment, 327 

inadequacy of, 45 

nature of, 7 

operating, 268, 323 

proving subsidiary ledger with 
controlling accounts, 254 

purpose of, 60 

stores, 298 

subdivision of, 237 
Liability, contingent, 12 

current, 12 

long-term, 12 

nature of, 11 

Loss from uncollectible accounts. 
132 



M 



Maintenance, 101 



N 



Net profit or net loss, effect of 
expense distribution upon, 376 
methods of determining, 84 



O 



Obsolescence, methods of handling, 

118 

nature of, 107 
Operating statements, preparation 

of monthly, 383 
problem of, 370 
Orders, job, 290 

process, 290 
Overhead expenses, in statement 

of cost of production, 372 
nature of, 287 
relatively fixed, 287 
variable, 287 
Ownership, causes of increase and 

decrease in, 158, 159 
corporate, 11, 140 
nature of, 11 
Ownership, statement of, 42, 158 



Partnership, 5, 11 

Patents, 220 

Payroll, accounting for, 342 

assignments against, 341 

importance of, 333 

internal check on, 335 

labor distribution of, 337, 345 

payment of, 341 

preparation of, 339 
Posting, cash disbursements jour- 
nal, 63, 249 

cash receipts journal, 61, 244 

cross checking of, 57 

current, 60 

effect upon accounts, 72 

general journal, 70, 250 



INDEX 



517 



Posting, principles of, 61 

purchase journal, 65 

sales journal, 67, 239 

summary, 60 

voucher register, 245 
Prepaid expense, 10, 98, 204 
Prepaid income, 101 
Prepayments, 98, 104 
Prime cost, 372 

R 

Raw materials, nature of, 285 

position in statement of cost 

of production, 371 
Renewals, 190 
Repairs, 190 
Replacements, 122, 189 
Requisition, stores, 297 
Reserve, appraisal, 144 

breakage and reconditioning, 
136 

capital, 140 

classification of, 131 

compensation insurance, 139 

contingency, 142 

depletion, 132 

depreciation, 120, 132, 216 

federal income tax, 140, 144 

fund, 143 

inventory, 137 

liability, 138 

maintenance, 135 

market decline in inventory, 
198, 381 

meaning of, 131 

operating, 134 

plant extension and betterment, 
142 

repairs, 135 

secret, 145 

surplus, 140 

tax, 138 

uncollectible accounts, 132 

valuation, 132 

water and power, 139 
Revenue accounts, a simple type 
of cost system, 357 

contrasted with regular cost 
system, 367 



Revenue accounts, distribution of 
expenses under, 361 

nature of, 358 

as operating controls, 367 

operation of, 359 

prorating expenses under, 361 

work sheet with, 364 
Royalties, 362 



S 



Sole proprietorship, 5 
Statements, financial and operat- 
ing, construction of, 152 
under revenue accounts, 370 
worth of, 163 

(See also Balance sheet; Cost 
of production; Income, 
profit and loss; Ownership) 
Surplus, 140 
statement of, 160 



Terms, cash discount, 28 
Time clock card, 336 
Transactions, dual recording of 

same, 57 
importance of correct analysis, 

47 

nature of, 7, 8, 25, 45 
procedure in recording, 46 
recording in journal, 56 
sorting the, 48 
Trial balance, definition, 73 

errors which will prevent balanc- 
ing of, 79 
errors which will not prevent 

balancing of, 80 

preparation with control ac- 
counts in use, 254 
proof, 183 



U 



Unit cost computation, 376 
Unit quantities, ascertaining un- 
known, 381 



518 



INDEX 



Valuation, of current assets, ac- 
counts receivable, 195 
accruals receivable, 196 
cash, 195 
consigned goods inventory, 

200 

finished goods inventory, 198 
finished parts inventory, 200 
inventories, exceptional meth- 
ods, 201 

notes receivable, 195 
raw materials inventory, 196 
temporary investments, 202 
work in process inventory, 198 
of intangible fixed assets, fran- 
chises, 221 
goodwill, 222 
leaseholds, 221 
patents, 220 
trade formulas, 221 
trade marks, 221 
for purposes of dissolution and 

liquidation, 223 

of tangible fixed assets, ad- 
vances, 209 
automobiles, 215 
bonds and capital stock, 209, 

210 

buildings, 212 
construction in process, 211 
containers, 214 
dies and molds, 214 
donated assets, 216 
furniture and fixtures, 215 
jigs and templates, 214 
land, 212 
machinery, 212 
patterns and drawings, 214 
real estate holdings, 210 
shafting and belting, 213 
small tools, 213 
special funds, 209 
Value, appraisal, 218 



Value, book, 212 
original cost, 110 
replacement, 218 

depreciation based upon, 116 
reproduction, 218 
scrap, 110 
sound, 218 
Voucher, 259 

plant activities preceding use of, 

261 

Voucher check, 268 
Voucher index of creditors, 275 
Voucher register, 228, 245, 262, 

316, 319 

Voucher stamp, 271 
Voucher system, 259, 261 
advantages of, 283 
distribution and summary sheet 

with, 263, 321 

operating ledger with, 268, 323 
purchase discounts with, 281 
Vouchered invoices, corrections 

for, 275 

discount lost, 277 
note issued, 279 

offset to customer's account, 280 
partial payment, 279 
purchase return or allowance, 
278 

W 

Wage payment, 333, 339 

frequency of, 340 
Wage tickets, 339 
Work sheet, advantages of, 85 

depreciation, 332 

description of, 83 

purpose of, 84, 89, 91 

with revenue accounts, 364 

steps in preparation of, 85 

summarizing, 88, 89 

theory upon which it is based, 85 
Working capital, 168 

turnover of, 169